Low Levels of New Supply Boost U.S. Lodging

CHICAGO—Fundamentals across the U.S. lodging sector remain unusually strong in the context of a cycle that turned 59 in July, based on consecutive months of positive TTM RevPAR, according to Fitch Ratings. TTM RevPAR was up 8 percent at the end of July—a growth rate that is roughly 200 bps-300 bps stronger than the prior two cycles at the 59-month mark. RevPAR growth is broad based across price tiers and geographies, supply growth remains muted and capital is widely available.

Fitch’s 7 percent U.S. RevPAR forecast for 2015 implies some deceleration, largely due to tougher year-over-year comparisons through the balance of the year. Fitch increased 2015 U.S. lodging industry RevPAR growth forecast to 7 percent from 6 percent in June, reflecting the measure’s YTD performance and moderately higher assumed employment growth.

However, there are a few concerning areas, which include the strength of the U.S. dollar and the drop in lodging stocks since January, which has traditionally been a good, but imperfect, leading indicator. Notably, Pebblebrook Hotel Trust, Inc. recently warned its third-quarter earnings would be at or below the low end of its guidance.

Most indicators suggest the industry in the latter phases of this cycle. Real RevPAR exceeded its prior cycle peak earlier this year and real ADR is now only 1 percent below its previous high water mark. Room rate gains are driving RevPAR growth, rather than occupancy. Group demand is accelerating, particularly for large groups. Supply growth is picking up steam, concentrated in the select service segments where the cost of entry is lower.


On the investment front, several hotel REITs have recently purchased resort assets, which tend to be a late-cycle play. Blackstone Group LP’s recent acquisition of Strategic Hotels & Resorts, Inc. could foreshadow additional consolidation—particularly given good demand for hotel loans in the large-loan/single-borrower CMBS market, in the context of steep valuation discounts (approximately 20 percent) for hotel REIT shares relative to net asset values.

We note benign supply growth distinguishes this particular cycle. The increase in real ADR has not elicited the same supply response as in prior cycles. Banks’ construction lending has generally remained disciplined, something we view as sustainable given the stringent capital charges for construction loans under Basel III.

Measured supply growth does not reduce the lodging sector’s economic sensitivity, but should support further pricing gains as long as the economy continues to grow (i.e. an extended upcycle). It could also help limit the cumulative decline in RevPAR during the next downturn. However, growth in short-term rental websites such as Airbnb Inc. (Airbnb) could exacerbate RevPAR declines during the next lodging industry downturn. Airbnb listings are likely to spike during recessions when labor markets weaken, forcing some individuals to find alternative avenues to meet financial obligations.

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