The US Hotel industry had its ninth consecutive year of growth in 2018, hitting record high levels for occupancy, ADR, and RevPAR. National RevPAR growth is expected to continue through 2019, though at a much-subdued rate as the pace of new lodging supply will begin to exceed demand growth.
US Hotel transaction volume hit a new peak in 2018 at $29.5 billion, surpassing every other year of the current real estate cycle. As we get later in the cycle, single asset transactions have decreased while mergers and acquisitions have taken a larger percentage of total transaction volume. With concerns about the continued longevity of the current cycle and with occupancy at- or near-peak levels, the gap between owners’ expectations and potential buyers’ caution-based market pricing has widened.
The debt markets remain highly liquid with many new players in the space, including dedicated debt funds that are being sponsored by strategic private equity firms, private mortgage REITs, and the Collateralized Loan Obligation (CLO) market. Interest rate spreads had widened over the last few years but have since tightened and remain very competitive with higher leverage easier to come by for existing assets.
With supply beginning to overtake demand on a national level, the best opportunities for hotel investment and development in strong RevPAR growth markets continue to be in areas that are more supply-constrained, such as San Francisco and Coastal California, Boston, and the Florida Keys. However, these areas offer significant barriers-to-entry due to the limited opportunities for investment and the corresponding high prices per key; far above replacement costs.
Even with increasing construction costs, there were over 200,000 new rooms under construction in the US through April 2019, a year-over-year increase of almost 10%. With the bulk of the supply coming in primary and secondary markets, strategic investors have started looking at well-anchored tertiary markets to expand their investment portfolios. Additionally, as investors take advantage of the capital gains tax relief by investing in Opportunity Zones, the supply pipeline is expected to continue its growth trajectory.
An increasing concern in the US hotel industry is rising labor costs, which have been compounded by increasing healthcare costs. To counter this, hotels have begun investing in automation including kiosk check-ins and robot room service. We have also seen a rise in new tech-based firms that are working to optimize operations, including housekeeping and concierge services, thus requiring fewer workers on-site.
Furthermore, there is rising consumer demand for differentiated hotel experiences in both the commercial and leisure segments. This has led to a surge in new, boutique branded and independent hotels that focus on placemaking, food and beverage, architecture and design, and activation of shared public spaces. Additionally, this growing trend has led to a proliferation of other alterative lodging options across chain scales, including home sharing, RV camping, tented accommodations, and all-inclusive wellness-focused destination resorts.