Do not disturb: Investors ready to hibernate on hospitality

Booming economies lead to higher hotel demand, and since the end of the recession the sector has seen incredible expansion. But by the end of the year, real estate investors may be ready to check out of hospitality for a while.

According to Matt Mering, executive vice president, hospitality at Waterton, the revenue per available room (REVPAR) in most markets should see modest gains, as economic growth moderates the effects of new supply. To increase earnings and market share, however, operators will have to think outside the box.

“Revenue management has become so complex nowadays you really need a strong focus on distribution and pricing. Additionally, a tight labor market will continue to erode margins,” said Mering. “It’s now more important than ever to have a strong operator at the property level who thinks and acts like an owner. This was a catalyst for our partnership with Waterford.”

In March, Waterton, a Chicago-based real estate investor and operator, aligned with Waterford Hotel Group, a hospitality management company headquartered in Connecticut. The strategic alliance combined Waterton’s investment and asset management experience with Waterford’s operational expertise as the companies seek to grow their hospitality portfolios.

Most private equity investors, according to Mering, seem to be cautious at the moment, citing a general consensus that we are late in the cycle. However, there is still interest in projects that have a strong thesis and are reasonably priced.

“Family offices and other investors who underwrite longer hold periods are stepping in and filling some of the void,” Mering said. “Supply tends to be a challenge in many desirable lodging markets. As a result, many investors are developing a ‘wait and see attitude’ in some of the markets that were very hot a few years ago.”

The debt markets continue to be robust with the debt funds leading the charge. Opportunity Zones are also drawing some developer interest. Generally speaking, however, new development has slowed down considerably.

“We predict there will continue to be headwinds (especially in urban markets), due to a shortage of construction labor and the uncertainty of the tariff/trade situation,” said Mering.

Chicago is far from immune to the coming pause that may hit the hospitality sector. In addition to a possible economic plateau, the political situation at the state, county and city levels could impact hotel investment and development.

“We’re cautious on investing in Chicago hospitality at the moment. There are some concerns around the state’s overall fiscal health and a volatile property tax environment,” Mering said. “That being said, Chicago is a large, dynamic market and the outlook can vary widely based on location, with downtown Chicago continuing to show strong growth and demand.”

Some of the city’s inner neighborhoods can also support more hotel rooms. Fulton Market, for example, has a lot of characteristics that hotel operators find compelling such as robust office demand, high barriers to entry and close proximity to the CBD and to public transit. The neighborhood also has a healthy mix of retail, F&B and residential development.

In River North, developer and owner Akara Partners recently opened Home2 Suites by Hilton, a 17-story, 206-room, extended-stay hotel. Another project, a 47-story, mixed-use tower that Sterling Bay plans to build on the Mag Mile, will include a 280-key hotel.

There is some action in the suburbs as well. Marcus & Millichap recently brokered the sale of a 117-room Hampton Inn in far flung McHenry, Illinois. The Gettys Group is halfway through a two-phase, $14 million redevelopment of Hyatt Regency Deerfield that, when completed in the beginning of next year, will have updated the lobby, meeting facilities and all 300 guest rooms.

In the years ahead, hotel consolidation may be the driving force for the asset class. Whether its to expand market share into new geography, to compete with homestay sites like Airbnb or to offer boutique experiences on an international scale, more mergers are coming to the hospitality sector

“I think you’ll continue to see more consolidation over the next several years as the traditional hotel companies (not named Marriott) continue to round out their brand portfolios and attempt to wade into the home-sharing market,” Mering said. “Loyalty has become so important and mergers and acquisitions are the easiest way to increase your loyalty footprint.”