Commercial Magazine

Jan Freitag, STR

A strong economy correlates with a strong hotel sector

By Neil Pierson

Hotels have had a strong recovery since the last recession. And it’s a sector that should continue to pique the interests of commercial mortgage brokers and investors.

Nearly all of the nation’s top 25 markets, as measured by analytics company STR, are expected to increase their hotel-room revenues in 2019. STR’s Jan Freitag spoke with Scotsman Guide about the outlook for hospitality properties.

Hotels seem to be a stable real estate sector today. Are there changes on the horizon?

The answer to the question depends on your conviction about GDP (gross domestic product) growth. Hotel-room demand is connected at the hip, so to speak, to GDP growth, so if you think that the American economy continues to grow GDP at a healthy clip of 2.5 percent [annually] or so, you then project — as we do — that room demand is going to continue to increase.

[GDP growth] is then driving RevPAR, revenue per available room, which is the metric that the industry uses to judge itself. We expect RevPAR growth to be positive, certainly positive [in 2018] and then positive again [in 2019] at a slightly slower pace. … So, life is good. It’s not great, but it’s good.

Are lenders being more aggressive right now in funding hotel deals?

I think we have to differentiate between lending on acquisitions and lending on new construction. New construction is really not a big concern. I’m saying this from the operational perspective. The number of rooms under construction has basically been flat or slightly down in nine out of the last 11 months. We have roughly 196,000 rooms under construction in the U.S., and that number kind of hasn’t changed very much. I would attribute that partially to bankers saying, “Hey, maybe construction lending is risky. Maybe the economy is a little long in the tooth.”

On the acquisition/disposition side … when I talk to my colleagues on that side of the industry, it sounds like there’s a lot of money out there that needs to be deployed. I think the hotel industry in the U.S. is still seen by foreign-capital (investors) as a relatively less risky place to park your money in a currency that people like.

Do hotels present opportunities for investors in distressed assets?

There really isn’t a whole lot of distressed [hotel] inventory like there was in 2009 and 2010, [when] there was this idea that this glut, this tsunami, this wave of distressed properties would flood the market. … And then the banks deployed this term that is used in other real estate [asset] classes, “extend and pretend,” when it came to loan payments. They were like, “You’re technically in violation of your covenants, but as long as you pay us, whatever. We don’t want the keys.”

It turns out, that happened for a lot of properties, so not a lot of properties changed hands in this sort of fire-sale fashion that a lot of people had anticipated (after the Great Recession). Distressed properties today, there’s always some, but there’s certainly not a whole lot. I think if you are in a top 25 market running hotels, you’re probably doing really well right now.

Are these top 25 markets the safest places to be, or can hotel owners mitigate risks in a smaller market?

I have a little bit of a negative point of view on that. … If something goes wrong macroeconomically and GDP growth contracts — and we go into a recession — the U.S. hotel industry will feel it, period, no matter where you are or who you are.

It turns out that room demand for luxury hotels recovered quite well out of the Great Recession. That might be an insulating factor. Obviously, having a unique value proposition and a unique property always helps. I don’t know if it’s a glut, but 71 percent of all hotels under construction today are what we call “upscale” or “upper midscale.” Those are limited-service properties that don’t have a full-service restaurant. … When things go south, it’s very likely that’s where we’re going to see the sharpest drops in room rates.

If you’re in a top 25 market in the newest limited-service hotels, you’re probably going to be fine. But if your [hotel is] already 25 years old, in a secondary market, and if your two new competitors are right next door, then it’s going to be a little tougher.


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