Is A Downturn Really Coming in the Hotel Space?
My Views on a Downturn - if it happens.
The subject has been creeping up lately - it was bound to happen. Those SKY IS FALLING articles are propagating albeit without substantial proof. We are seeing more articles with the word “downturn.” Doesn’t mean It’s coming – and doesn’t mean it isn’t on the way.
Maybe the “tide that lifts all boats” has gone out to sea. So, if the dooms day projections are right a downturn will follow the longest “up-cycle” in the history of the hotel industry – 8 or 9 years verses the historical 5 to 6 years. A look at new supply from reliable sources, LODGING ECONOMETRICS there are 200,632 rooms under construction, with an additional 245,214 to break ground within in the next 12 months. I won’t mention the 175,000 + that are in the early planning stages as experience has shown that not all the potential new supply in “the early planning stages” may ever happens. As the phrase in a classic song goes – “romance without finance ain’t got a chance.” Three of our most reliable predictors of supply (STR, CBRE, PKF) forecasted a 2% growth in 2018.
Economists tell us as well that notwithstanding a black swan event occurs, the economy will grow by 2% in 2018.
While it’s just too early to state with certainty (and back it up with data) that a hotel industry “downturn” will or won’t happen, we’re suggesting that if it happens and/or hotel operators believe it , we’ll see 5 signs things that will follow.
The new supply pipe line will dry up in the classifications mentioned above.
Room rates will decrease in most markets.
Hotels developed without ample equity could be in trouble.
Capital for upgrades will become extremely scarce for this commercial real estate class.
Purchase price per room will drop.
History has shown us that hotels with the following characteristics (in no particular order) have and will survive.
Hotels whose debt service line item is low enough to sustain a decrease in RevPAR.
Hotel owners that enjoy a good relationship with their lenders.
Hotels that were developed to align with its market segments (guest profiles) and potential changes within, rather than responding to the latest trends.
Hotels with good relationships with their primary generators of guest room demand.
Hotels affiliated with a brand whose guest reward system reflects the hotel’s guest profiles.
Hotels that have sustained and continue to receive good reviews from guests.
Hotels affiliated with a brand that has successfully navigated previous downturns - and who have experienced cadre to assist francisees.
Hotels that have not deferred maintenance and upgrades during this up cycle.