Despite a choppy economic recovery, the U.S. hotel industry will maintain solid footing in 2016, industry experts expressed during day one of the Hunter Hotel Conference in Atlanta, Ga., this week. U.S. revenue per available room growth is off to a slow start, but STR is projecting 5 percent RevPAR growth for the year.
There are 149,000 hotel rooms under construction in the country, up 17 percent from a year ago, STR data shows. Two-thirds of those rooms are in the limited-service sector. STR predicts 2.3 percent demand growth in 2016, while supply is expected to grow by 1.7 percent. Although there is broad-based demand strength throughout the United States, urban markets are feeling supply pressure. In 2015, national supply change increased by 1.2 percent, noted Tyler Morse, CEO and managing partner of New York City-based MCR Development. “If you add up the new supply in Manhattan, Miami, Nashville, and Austin, it’s more than half of the new supply in the country,” he said.
Supply can be an issue in any market, including suburban and tertiary ones, added Suril Shah, managing director of Starwood Capital Group. For a company the size of Starwood Capital, which has 350 select-service hotels across the country, there isn’t a significant impact to the overall portfolio when one or two hotels get built in a small submarket. But individual investors with only a handful of hotels should be cautious, he warned. “Watch supply because in a tertiary market with a smaller number of demand generators, you can get crushed hard by new supply.”
Morse noted that many investors are too heavily focused on high RevPAR markets and only want to play in cities like New York, Miami, San Francisco, and Boston. MCR has two properties in Egg Harbor, N.J., a small town in Atlantic County, that run 350 percent RevPAR index and are great investments. “The public companies, the Wall Street guys, have a predilection toward higher RevPAR, and they push Wall Street CEOs to buy higher RevPAR, and that is an unfounded investment thesis,” Morse said. “You can make great yields at $50 RevPAR or $150 RevPAR, it just depends on your basis. But you shouldn’t have a bias toward one or the other.”
Columbus, Ohio-based Rockbridge, which has about 80 properties across 25 states, is not focused on the RevPAR metric, CEO Jim Merkel said. “We’re focused on how can we create value for our investors, and that’s on the bottom line.” It’s more important to look at a hotel’s position in the market and consider the risk of a new property coming in to steal that position, he added.
Nelson Knight, EVP and chief investment officer of Apple Hospitality REIT, said his company’s focus is much broader than the top 10 markets, but on average, they have a harder time coming up with the capital to cover capex needs in a property’s sixth and 12th-year cycle if it’s producing RevPAR below $100. “When we underwrite a deal, we look not specifically at what the RevPAR is achieving, but can it cover its own renovation cycles,” Knight said.
With $200 billion of CMBS and other commercial obligations coming due in the next two years, the debt overhang from 2006 and 2007 is another cause for concern, Morse said. “Even if the debt yield is there, some staggering amount of debt is being refinanced in the next 24 to 36 months, and it’s a little unclear if that going to be able to happen.” The industry will see a decrease in transaction volume due to the debt market dislocations in 2016, Morse added. “Fewer transactions means less statistically significant cap rate pricing.”
While there is a level of uncertainty in future cash flows, the underlying industry fundamentals are still sound, Merkel said. “We’re very comfortable with where the market is. These times of change create a lot of opportunity for us. We’re always doing transactions and we’re selling deals. We’re really focused on timing the deal, not timing the market.”