Commercial Investment Real Estate May/June 2016 | Page 25

rates in January are 27 basis points higher than a year prior and are at their highest lev- els over a three-year period. T reats. New supply is being artif cially created by Airbnb; however, industry experts are uncertain how much collateral damage is being done to the industry. Because Airbnb is not forced to reveal its operating results, the industry has no way to gauge its true market. “T ere is little evidence that Airbnb is leading to fewer compression nights or reducing pricing power of those nights,” STR recently reported, But, according to a recent Goldman Sachs survey, “once con- sumers switch, they don’t go back to hotels.” Until the playing f eld is leveled, and Airbnb is required to license and collect taxes, IRR believes that it remains a credible threat to the industry. Wage growth has increased by 5 to 6 percent in the past few years, according to Marcus & Millichap. Growth in 2015 was estimated at 2.1 percent and is expected to continue at 2.5 percent for 2016. RevPar growth of 8.0 to 10.0 percent has allowed operators to continue to pay increasing employee costs, but any leveling of ADR and occupancy would create an escalating expense, and a decrease in net operating income and resultant values. Financing. Developers continue to utilize lagging supply that’s still trying to catch up to growing demand. ADR Growth. Because of the forecasts of demand exceeding supply, IRR sees ADR growth ranging from 5.0 to 6.3 percent through 2018. Marcus & Millichap is pre- dicting a $125.41 ADR in 2016, which repre- sents an increase of 4.5 percent. Transactions. CoStar reports a year-end total of 2,520 transactions in 2015 versus a year-end total of 2,517 transactions in calen- dar year 2014. Transaction values climbed in 2015 to $49.7 billion, according to Real Capi- tal Analytics, a 45.2 percent year-over-year increase. Geographically, the largest YOY increase was realized in the Central region (106.6 percent), followed by the East (74.8 percent), the South (37.9 percent), and then the West (21.0 percent). However, in January, the total transac- tion volume was down 60 percent across all hotel types from the year prior. T e January volume was the lowest monthly volume in the past two years and the third lowest since January 2013. While transaction volume may dip throughout the remainder of 2016, IRR believes that the average price per room will continue to show steep gains, similar to the YOY gains between 2014 and 2015. Hotel capitalization rates are gradually trending upward, according to RCA. Cap f oating rates, taking advantage of the low Treasury rate. While there is some continued risk of increasing interest rates, it appears to be mitigated and of set by the current ADR and NOI growth. Increasing room rates and record occupancy levels allow developers to receive better f nancing terms. Because demand continues to outpace supply through- out most of the country, new construction is not yet a cause for alarm. Strength Factor: Demand Demand is driving the hotel segment in North America. T at demand is causing upward pressure on both ADR and RevPar, across both large U.S. cities and resort towns on the water. Continued demand will drive high occu- pancy rates over the next few years, and it will outpace supply even as more hotel rooms come online over the next 12 to 24 months. From coast to coast, investors see hotels as a safe bet because of these underlying funda- mentals and favorable f nancing. Consistent job and wage growth should continue to bol- ster these trends. Jeff Greenwald, MAI, SRA, FRICS, is senior managing director/principal, Integra Realty Resources in San Diego. Contact him at [email protected]. Hotel Supply and Demand Growth Trends 7.3% 8% 6% 4.7% 4% 2% 2.4% 1.2% 4.4% 2.8% 2.9% 2.8% 2.0% 1.7% 0.7% 0.5% 0.4% 0.7% 0.8% 1.1% 2.1% 1.6% 1.8% 1.7% 2016* 20-Year Avg. 0% -2% -2.5% -4% -6% -6.2% -8% 2007 2008 2009 2010 * Forecast * Forecast Sources: Marcus Services, STR, Inc. Inc. Sources: Marcus & & Millichap Millichap Research Research Services, STR, CCIM.com 2011 Supply 2012 2013 2014 2015 Demand May | June | 2016 