As we enter the second quarter, Burba Hotel Network (BHN) recently connected with hotel investment leaders across North America to gauge the investment outlook. They were asked to comment on hotel investment opportunities, the current stage of the hotel investment cycle, their expectations about the availability of capital for new hotel construction, and their reaction to the data gathered earlier this year in the BHN Hotel Investment Survey.
While it is interesting to start to draw analogies with other hotel investment cycles, or try to guess the answer to the proverbial question ‘What inning of the game are we in?’, the takeaway from these interviews is that the ‘game’ isn’t nearing the end. Even though activity might be slowing and shifting in the U.S. and Canada, perhaps we are at a plateau and not the peak after all! The record crowd at ALIS this past January in Los Angeles seemed to be viewing the future with more perspective and maturity than we saw in January 2008 (the previous record crowd at ALIS), and we all know what happened the following summer after the ’08 event! Currently, the investment outlook south of the border and in the Caribbean is generally more positive than in the U.S. with sunny days still on the horizon. This is not surprising to anyone who follows investment cycles in the Americas.
Subtle Shifts Across the U.S.
Even though the longer than normal cycle of robust growth in hotel performance and transaction activity may be slowing in the U.S., industry fundamentals still appear to be good. However, the fundamentals may be changing, according to the executives we talked too.
As a leading U.S. hotel owner, Jay Shah, CEO, Hersha Hospitality Trust, shared: “We continue to believe it is a great time to be a hotel owner as demand and pricing power remain at all-time highs. Given record occupancies across the country, the industry remains extremely well-positioned to raise rates, with rate-based gains driving significant profitability growth for hotel owners in 2016 and beyond.”
In adding his perspective about the investment outlook, nationally prominent hotel advisor, Chad Crandell, managing director and CEO, CHMWarnick, commented: “We are seeing a significant volume of deals with our investor clients. However, the spread in pricing between sellers and buyers is widening due to the recent uptick in interest rates for hotel loans and decelerating growth in RevPAR performance for the first two months in 2016. The winds of change in this economic recovery are beginning to be felt both in investor sentiment and in transaction volume.”
Further elaborating on the ‘winds of change’ idea, Kevin E. Mallory, senior managing director – global head, CBRE Hotels, added: “Volatility and price discovery appear to be strong market attributes today. REITs have underperformed and are out as investors, the CMBS markets are choppy, and foreign capital is subject to various positive and negative forces – these dislocations lead to M&A activity of which we are seeing no shortage. While I expect an increase in total transaction activity, I believe we will see an actual decrease in single asset sales as activity shifts to predominantly portfolio and M&A activity.” Nothing sums up Mallory’s insights better than the IHG/Kimpton deal, the announcements of the Marriott/Starwood deal and the Accor/Fairmont deal. There is no shortage of rumors about who might be the next M&A target.
When survey respondents were asked earlier this year what stage of the hotel investment cycle they believe we are currently in, it was interesting to note that the largest share, nearly half, thought that the U.S. was in a late stage of an upturn. Survey respondents believed all other regions of North America were in an earlier stage of growth/recovery. A different survey question which provides some additional insight about how confident the respondents were about an increase in investment opportunities in 2016. Crandell commented: “It was interesting to see the (BHN) survey results indicating 58% ‘somewhat confident’ about the (outlook for increased) volume of hotel investment opportunities in the U.S. The level of confidence appears to be shifting from ‘very confident’ sliding to ‘somewhat confident’.”
With the long run of strong hotel market performance and a large volume of capital chasing deals, it’s no surprise that development in the U.S. continues to pick up. Over half of the survey respondents believed that money provided for new hotel construction will increase in 2016 compared to 2015. According to hotel research firm STR, at least 865 hotels with 103,230 rooms are currently under construction and scheduled to open in 2016, which is a 1.5% uptick in rooms opening this year and 21% more rooms under construction than a year ago. Touching on the outlook, Andrew Cohan, managing director of Horwath HTL – Miami, says: “From the stock markets’ worst January on record, to the March rebound, it is clear that the so called ‘Outlook’ now gets updated weekly instead of once or twice per year. Strong travel activity will continue to provide a strong foundation for continued hotel and resort development as long as capital continues to flow.”