The hotel sector is seeing healthy demand via three major sources—corporate transient travel, group and conventions business and leisure travel. This demand is leading to fuller hotels, allowing operators to increase room rates, according to JLL’s Hotels Investment Outlook for the fourth quarter of 2017. This acceleration of operating fundamentals is making investor confidence in the sector more positive.
Employment growth and rising household incomes are culminating in long-deferred family vacations with travelers spending more on hotel rooms during trips. Hotel revenue per available room saw 3.0 percent growth in 2017. Most of this came via an increases to average room rates, which rose 2.1 percent on average. Hotel room occupancy was up, but only by 0.9 percent.
Last year marked eight consecutive years of increased hotel operating performance. Nationally, demand is outpacing supply with per-room revenue growing, backed by a healthy economy and strong corporate profits. The report predicts that hotel revenue per available room should grow by just under 3.0 percent in 2018.
However, hotel transaction volume declined in 2017. Last year’s $24 billion in total transactions represents an 18 percent decline relative to 2016.The causes for this were decreased foreign investment and fewer portfolio transactions. In fact, single-asset transactions drove the bulk of activity in 2017; if a $5.5 billion, 15-asset portfolio transaction between AnbangInsurance Group and Strategic Hotels & Resorts were removed from 2016’s activity, the year to year activity held steady.
Those single-asset transactions were reduced in urban locations, possibly pointing to investors’ concerns over the supply dynamics of top urban markets. Resort locations, on the other hand, saw notable increases in single-asset transactions. But according to the report, lending fundamentals are just as important to investor activity as property/portfolio characteristics.
“A factor that will hamper meaningful growth in transaction volume in 2018 is the open and active lending environment, which is boosting refinancing activities; some owners will embrace this as an alternative to selling,” the report’s authors wrote.
In Chicago’s CBD. full service hotel cap rates were average compared to the rest of the nation at 7.5 percent. Comparable hotels in New York’s CBD are seeing 6.3 percent cap rates while Houston is at 8.3 percent.
But Chicago’s hotel revenues are under pressure, driven by elevated supply deliveries. This is resulting in more tepid underwriting and investor activity. Hotel rooms currently in the city’s construction pipeline make up just short of three percent of the existing supply. That contrasts with markets like Nashville, TN which will more than double its supply with the rooms now under construction.
The number of hotel rooms under construction in the U.S. remained flat or declined for three consecutive months at the end of last year. Construction starts were also down, with the number of rooms under construction as of December decreased by nearly 4.0 percent when compared to the same month in 2016—the largest monthly decrease in six years. Slowing deliveries will bolster hotel performance as demand remains at an all-time high.
Overall, the demand picture and investor sentiment are improving. “Investors have a more confident outlook as compared to one year ago, as there is more clarity around what have been the main risks to continued growth,” the report authors wrote. “Openings of new hotels dampened selected markets’ performance in 2016 and 2017. Supply risk remains top of mind; however, the construction cycle appears to be cresting.”