Not Half Bad


Lodging Industry Gets Passing Grade In 2017 Mid-Year Report

With the Fourth of July fireworks behind us and the summer season in full swing, this seems like a good time to take a look at how the U.S. lodging industry fared during the first two quarters of 2017. And I guess the best way to say it is that the first half wasn’t half bad for hoteliers.

Considering that we entered the year with a number of concerns ranging from the new incoming Trump administration—and its potential impact, particularly in light of a potential travel ban—to the strong likelihood of increased interest rates. 
That’s not to mention the fact that we’re far past the point where a typical hotel seven-year cycle would have ended and started going the other way. Nevertheless, while profitability has leveled off somewhat in recent months for some, the consensus is that overall conditions remain solid.

For example, through May overall RevPAR had grown 3.1 percent year-to-date, while ADR spiked 2.4 percent, according to STR. Modest gains to be sure, but certainly nothing to be troubled about. In addition, demand continued to outpace supply, increasing 2.5 percent versus 1.8 percent.

A deeper dive into the numbers reveals that they’re, in fact, very market specific. Many top MSA’s, like New York and San Francisco, are seeing oversaturation and oversupply as demand that has leveled off, while still other markets, like Nashville, continue to thrive on the strength of solid fundamentals.

If you were in attendance at the recent NYU Hospitality Industry Investment Conference, you heard high-powered brand execs use terms like the ‘new normal’ in reference to continued RevPAR gains and a ‘golden age of travel’ citing marked increases in global tourism. Of course, whether or not this is the new reality or just wishful thinking remains to be seen.

Most industry observers had predicted the continued movement toward consolidation to occur following the finalization of the Starwood/Marriott mega-merger as more and more companies seek scale to better compete with OTAs and the like. To that end, there were a couple of significant deals in the first half of 2017 as RLJ Lodging agreed to acquire FelCor Lodging Trust and Best Western acquired Sweden Hotels and its portfolio of 59 hotels. The latter deal immediately makes Best Western the largest chain in Sweden with some 135 hotels. The former deal, meanwhile, creates one of the largest hospitality REITs in the U.S. with approximately 160 properties and an enterprise value of roughly $7 billion.

However, the impact of Marriott’s acquisition of Starwood extends way beyond the aforementioned deals and any consolidation that occurs. The unprecedented transition of the companies, the brands and the affected properties continues to move forward and has seemed to be relatively seamless.

Meanwhile, overall economic factors have generally given the industry some tailwinds as well as the stock market continues to rally—reaching record numbers and hitting a new intraday high earlier this week—and consumer confidence is high. And while some in the industry believe transaction activity—which has been slightly subdued during the first half—has been impacted somewhat by rising interest rates many are projecting deal activity to pick up considerably in the back half of the year. In addition, hotel valuations remain relatively unchanged.

In talking with many hoteliers at the recent NYU conference, it seems the biggest cause for concern for the industry right now is terrorist activity or what they might term “black swan” events. As attack after attack seems to occur throughout the world, such as the recent ones in London, the fear is that it will curtail global travel.

As always, the remainder of summer will go a long way in determining the balance of the year as families set out on vacations, many of which are in drive-to locations. 
STR did recently revise its forecast down a bit projecting supply for 2017 to outpace demand slightly, 2 percent to 1.7 percent, respectively. Meanwhile, RevPAR growth is expected to be 2.2 percent, while ADR gains by 2.5 percent. Occupancy is expected to decline by 0.3 percent.

But while these numbers might pale in comparison to the frothy results of recent years, a little perspective is needed to recognize that it is still positive growth. In fact, the industry has had 87 consecutive months of RevPAR growth, according to STR. If that number is at 94 by the end of 2017, it’s safe to assume it was a pretty good year.