Commercial Investment Real Estate September/October 2019 | Page 35

the brand and product type are as important as they have
been, just because people have so much information at their
fingertips. Still, they’re interested in their loyalty rewards,
too, so they do have to stick within that family.”
Looking Ahead
Despite the growth and the current health of the sector,
those within it need to look to the future. Potential chal-
lenges, Cooper says, include increasing labor costs, trade
tensions, an aging U.S. travel infrastructure that could
slow travel, and slowing economic momentum. Murphy
says competition for labor is also tight. “If you have con-
tractors who have the capability to do hotels, they also
have the capability to do multifamily or mixed-use prod-
ucts,” she says. “And since we’ve seen a lot of growth in
those sectors, you’re competing with those product types.”
Just as important, she adds: “It’s really critical for these
hotel developments to get timed properly. We’ve been see-
ing timing on projects shrinking, especially on the limited
service/flex service side. It’s been interesting to see folks
who are trying to do new hotel development now because
of where we are in the cycle. We’ve had 10 years of expan-
sion, which is an unprecedented length in the economic
cycle for hotels, so there’s been this uncertainty on when
the next correction is going to be. You’ve got projects that
have to open before that happens. If you don’t, you’re going
to be scrambling, competing against existing hotels with
existing bases of business.”
Hotels also face the increased popularity of short-term
rental services such as Airbnb and VRBO. Marcus & Mill-
chap’s Cooper points out that it’s uncertain how these ser-
vices could perform in the event of an economic downturn,
because they were less common during the last recession.
“[There’s been a] shift in attitude. I feel like a year or two
ago, there was almost a panic. There is still some concern,
but now they’ve been in the market for a while,” Murphy
says. “Hotels have survived, and they’ve continued to grow
occupancy. Yes, they haven’t been able to grow average rate as
much, and I think a lot of people blame Airbnb and VRBO
whenever hotels get too expensive. But they’re not going away,
and operators know that now. Also, cities are passing regula-
tions, trying to make it an even playing field. That’s helping,
and that’s also giving people pause to rent out their units.”
Because more markets are performing at above-average
occupancy levels, CRE professionals looking to make invest-
ment decisions need to look at factors other than occupancy
rates. Woodworth says that “investors should focus on other
measures, such as the average room rate growth and the level
of new supply that has recently opened or may be under con-
struction, as well as economic indicators such as population
growth, increase in the labor supply, employment growth,
and infrastructure investment.”
Cooper emphasizes demand, because “hotel-room
demand changes can manifest in the occupancy rate,
CIREMAGAZINE.COM
but also in other metrics such as average daily rate and
RevPAR.” For example, he says, in a market experiencing a
change in hotel demand, investors should question whether
the change is marketwide or specific to one location, chain
scale, or service level.
Investors also need to be cognizant of financing. “A lot
of lenders and equity investors out there are interested and
willing to lend in the hotel space — they’re looking for good
products,” Murphy says. “But I’ve been hearing that they’re
just not finding ‘good enough’ deals. It’s a hard sell right
now within the hotel space in markets where we’re reaching
unprecedented occupancy levels — you have high occupancy
with not a whole lot of rate growth. But you’ve got increasing
property taxes and increasing labor costs that aren’t affecting
net operating income (NOI), so it’s been more challenging
for financing.”
“We’ve been seeing a shift into
secondary and tertiary markets that
have lower barriers to entry, but it’s
very crowded in that space. Nashville,
Tenn., and Austin, Texas, have an
incredible amount of new supply...”
— Skyler Cooper, Marcus & Millichap
Woodworth notes that to position safely for a downturn
(“which we do not see happening within the next three
to five years”) owners should avoid “over-leveraging their
assets. Given the high fixed cost nature of hotel operations,
excess debt can be a significant issue. However, because the
average U.S. hotel is achieving an atypically high occu-
pancy level and considering lending standards have been
relatively conservative in the current cycle, we do not see
this as a problem for most property owners today.”
Murphy cautions that investors need to consider their
timeline when planning ahead. “Historically for hotels we
might see a hold of three to five years at the low end,” she
says. “But we’ve been seeing that expand to seven to 10
years because of where we are in the cycle.
“Take a hard look at how you’re operating the property.
When your occupancy declines overnight, you have to shift
your model significantly to maintain your profitability, so
start preparing for that now. Look at your areas of effi-
ciency and have strategies in place to streamline. Look at
the strength of your management team, its ability to tap
into local markets and trends, and how you’re positioning
yourself to competitors.”
Sarah Hoban is a business writer in the Chicago area.
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