David Roedel, Roedel CompaniesI find that most hotel developers, like real estate developers in all asset classes, are optimistic. When you think about development in relation to the cyclical nature of our economy, deals would rarely be made if every developer tried to time their investments to match the height of every cycle. What sets the most successful apart are those that surround themselves with team members who offer cautionary advice based on both data and a “gut feel” from years of experience.
Over the past five months I’ve attended a variety of hotel industry conferences, data presentations and met with many of my peers. For most, our business is as eternal as spring with projects in the pipeline, money ready and willing to be deployed and strong lender relationships that allow developers to expand their portfolios.
The Data: Smith Travel Research (STR) recently announced the first quarter results for the US hotel industry. While the numbers continue to trend positive there are a few cautionary tales. Compared with Q1 2015, the U.S. hotel industry’s occupancy dipped 0.5% to 60.7%. However, ADR rose 3.2% to $120.92, and RevPAR increased 2.7% to $73.34. Another possible red flag is the supply and demand numbers. Industry supply (+1.5%) outpaced demand (+1.0%) for the first time in a quarter since Q4 2009.
According to Bobby Bowers, STR’s senior vice president of operations, “Several factors contributed to the industry’s slow first-quarter performance, including difficult to match comparisons, the Easter calendar shift from April 2015 to March 2016 and harsh weather conditions in some areas of the country.” Much of the negative discussion I’ve heard this year focus on the energy markets and greater New York City. The data, once again, supports those concerns. Houston, Texas, saw the largest RevPAR decline, down 9.5% to US$72.26, while New York City reported the largest drop in average daily rate (ADR).
Primary Concerns: The primary concerns voiced by many hospitality professionals focus on the following areas: • Energy markets including Texas, Pennsylvania and Ohio; • The current state of the Commercial Mortgage Backed Securities (CMBS) market and the impending maturities over the next three years; • Additional hotel supply; • Tightening lending terms; and • The Presidential election.
The negative impact of the energy business in certain markets is raising concerns. As the data in Houston demonstrated, dropping RevPar year over year 9.5% is a red flag. For example, dropping RevPar combined with an increase in supply only promises to make the situation worse in certain energy markets. The CMBS situation is grabbing additional headlines. At a recent conference in Dallas, the CMBS situation was a major focus. Discussion went back and forth about whether or not this financing vehicle was completely dried up or whether it was a function of waiting until they needed money to refinance the wave of loans maturing in the next three years. According to Steve Van, President and CEO of Prism Hotels & Resorts, “More than $20 billion of CMBS hotel loans will mature between now and 2018, citing data from Trapp LLC. The number is about $8 billion in 2016, $8 billion in 2017 and $4 billion in 2018. The majority of these loans were originated in 2006 and 2007.” Once again, depending upon the state of the economy, refinancing these loans, along with the required capital investment to maintain the hotel in first class condition and meet brand standards, could be an issue.
As we all know, developers will continue to develop as long as banks loan them money. So, unlike the last recession, will banks actually prevent over supply within the next three years by tightening their lending practices? For the most part, that is what we are seeing. Loan to cost ratios continue to hover between 60-65% meaning more equity and, in the new development world, completion guarantees and recourse. This does not mean hotels are not opening and being developed, especially in the Boston and greater Boston markets, with strong sponsors developing sought after national brands. But, let’s hope it does prevent senseless saturation and over supply.
The Presidential election, by most accounts, is a clown show. That said, who prevails is causing some to pause and utilize a “wait and see” approach. For some, the thought of a more liberal administration is a major concern. John Keeling, EVP of the Valencia Group, summed it up best at a recent conference;
“I think the election in November is important for our industry,” Keeling said. “If we get a regressive-type administration that thinks the way to bring prosperity is to tax the rich and support the unions, then the economy will slow down and (the hotel industry) might see a downturn. On the other hand, if we get someone who is all about reducing taxes, reducing regulations, encouraging investment and not putting burdens on repatriating funds to the U.S., then we might see (gross domestic product) growth greater than 2%, which could have a huge impact on our industry.”
Moving Forward: The development and transaction markets are tricky to navigate these days. In the Northeast, as everyone reading this article understands, building new is a long, arduous process that takes a great deal of time, money and resources. Basically, if you find a good piece of real estate today you’re looking at a minimum of two years before you check anyone into your new hotel. So, depending on whether you are a developer who wants to “flip” the hotel to the next owner or whether you own, operate and hold for ten years or more, timing is a major factor. If the market hits turbulence and there are no buyers lining up to acquire your new hotel when it opens you need a plan B. In our case, as owner/operators, we take a longer term, more conservative approach and look beyond the next possible downtown in the economy.
I wish everyone the best of luck with their current portfolio and exciting new projects!
David Roedel is managing member at Roedel Companies, LLC. As a managing member, he is accountable for meeting or exceeding the companies’ annual and three year strategic plans. Specifically, he is responsible for real estate development including hotel acquisitions and development and implementing a marketing and public relations strategy which supports its growth and revenue goals.
