Keep your head down and keep pulling, the Boston hotel industry peak is a long way off! - by James O'Connell

James O'Connell, O'Connell Hospitality Group

Like those scullers on the Charles River, put your head down and keep pulling! The finish line is nowhere in sight! Trying to determine where it is only costs you time. And time is money! Row like you’re chained to an oar in a Roman galleon! Let’s go! Keep pulling!

Where’s the peak? It’s too far away to be looking for it! The hotel industry has been on a good ride for 70 months. That is 22% less time than the last good ride we were on before the end in Q3, 2008. We have at least 18 – 24 more months of good growth before room supply becomes an issue. With so many asking “where’s the peak?”, it’s like the kid in the back seat whining “how much longer?”

Today’s room supply under construction is approximately 142,000 rooms (Lodging Econometrics). That is half the number under construction at the peak of the cycle in 2008 when over 280,000 rooms were under construction. Room supply isn’t expected to negatively impact the industry until well into 2017. If we look at a micro view of that for the New England region and Boston in particular, there will be very few supply additions that negatively impact the markets. The Boston market exceeds 85% annual occupancy. Two factors actually help Boston’s long term hotel performance. The combination of increased construction costs (union labor requirements) and now pressure to execute hotel union labor contracts cause many projects to proforma as infeasible and will act as a dampener for new supply and Boston’s occupancy will remain high and room rates will continue to rise because strong room demand is expected to continue.

Occupancy across the country is at an all-time high at 65.6% according to Smith Travel Research. Room rates up 4.5% and RevPar up 6.3%. Two dominant markets with two very different negative impacts account for approximately 8% of the total demand. New York City has been negatively impacted by increased supply (they can actually build a hotel using non-union trades) and a strong dollar causes a drop in demand for international travel. As the dollar strengthens, international travel demand decreases. While the northeast rejoices as oil prices drop, Houston is the opposite. With each dollar drop in the cost of a barrel of oil, there is a drop in demand for hotel rooms. Almost an exact ratio. If those two markets are removed from the equation, the rest of the country is booming!

A group is defined by the renting of more than 10 rooms per night. Group demand continues to grow, but is being impacted by transient demand (less than 10 rooms in a block purchase). When hotels are running over 85% occupancy, operators would prefer to rent rooms to transient guests and groups get pushed into secondary markets. There is also significant growth in groups that rent blocks of 1,000 or more. Traditionally, convention business group demand lags transient demand in upward cycles. It is believed that as the economy continues to improve, there is no end in sight for large group business.

Wages and salaries continue to increase. Unemployment is approaching historic lows in many parts of the country. 268 Walmart’s are expected to close in 2016. That will negatively impact a lot of households. But they don’t generate a lot of room demand. Having the GE world headquarters in Boston will generate room demand.

Wall St. has hit the publically traded hotel companies hard because of the decreasing rate of the growth rate. However, private equity has stepped in and caused 2015 to be a record year for single asset transactions. 2016 is expected to be another very strong year for private equity. Cap rates for quality assets has been driven down to where the search for yields has caused institutional private equity investors into secondary and fundamentally sound tertiary markets in search for deals.  This bodes well for owners in markets outside I-495.

Lastly, liquidity is a key factor for the engine of growth and hotels in 2016 will continue to be strong candidates for loans from local, regional and national banks. Hotel loans comprised 20% of the Collateral Mortgage Backed Securities market in 2015. You don’t have to watch “The Big Short” twice to know that’s a good thing!

“The trouble with the world is not that people know too little, but that they know so many things that ain’t so.” said Mark Twain.

So crack the whip and keep the galley oars rowing. We’ve got a lot more steam left in the engine. The ant is still pushing the rubber tree plant! There are many miles to go before we sleep and hopefully the Inn will be full when we get there!

James O’Connell is the principal of O’Connell Hospitality Group, LLC, Danvers, Mass.