The Hotel Sector is Poised for a Strong 2018, but Caution is in the Ai

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The hotel business is likely to break more performance records in 2018, according to experts in the sector.

Developers continue to flood the pipeline with new projects. But since land to build hotels on is hard to find, and lenders are reluctant to make construction loans, the number of hotels under construction began to shrink at the end of 2017. This is the case despite the fact that more hotel rooms have been occupied over the last 12 months, on average, than ever. Because development is getting more difficult, the number of hotels under construction began to shrink at the end of 2017.

“The growth in the demand for hotel rooms will slightly outpace the growth in the supply of hotel rooms in 2018, and that will again get us to an occupancy record,” says Jan Freitag for senior vice president at STR, a Hendersonville, Tenn.-based research firm that tracks the hotel industry.

The market for hotel rooms keeps getting better for hotel operators. Revenue per available room (revPAR), a key indicator of the health of the business, has risen for 94 months in a row, according to STR. It’s very unusual for average revPAR to rise for this many months in a row—nearly eight years—without interruption.

“It is a common belief that revPAR cycles last seven years,” says Freitag.

Lenders worry that by the time a new hotel development is completed, the demand for hotel rooms might fall. “That makes investors skittish and it makes banks and lenders less willing to support new hotel projects,” says Freitag.

Developers are likely to open 60,000 new hotel rooms in the U.S. in 2018. But in 2019, developers are only likely to open 45,000 to 50,000 rooms. “Assuming that all of those rooms deliver on time, 2018 will probably be the peak year in the real estate cycle for the new construction of hotel room,” says Jeff Myers, managing consultant for CoStar Portfolio Strategy, a third-party advisor.

That peak is not so very high. “On a percentage basis, were are just slightly above the normal level of new construction,” says Myers. “New construction of hotels has not been going gangbusters.”

Now the number of new hotel rooms under construction has started to shrink. Not only are banks less willing to lend to hotel properties, hotel developers have to struggle to find land where they can build new properties. Workers can also be difficult to find, which adds to the cost of construction.

The difficulty of building new hotel rooms is likely to help make the good times last even longer for the hotel business. The worry that lenders have that developers will build too many hotel rooms is wiped away if those developers can’t borrow the money that they need to build. “This has all sorts of positive implications for the industry overall,” says Freitag.

The occupancy rate for hotel rooms in the U.S. seemed to peak and had begin to fall slightly in 2017. However, as developers have started construction on fewer new hotel rooms, occupancy rates are expected to rise again on average in 2018, according to STR. 

The only real risks to the successful operation of hotels appear to be dangers from the outside, for example, a shock to the broader U.S. economy that could hurt the demand for hotel rooms. “The 2001 and 2008 shocks to the hotel industry came from the outside,” says Freitag.

So far, the only hotel markets in 2018 that face serious challenges are absorbing hotel rooms built to respond to a short-term change in the local economy.

In Minneapolis, hotel developers recently increased the inventory of hotel rooms by 3.5 percent to accommodate the Super Bowl. Now that the Super Bowl is over, hotel operators are struggling slightly to keep these rooms full. RevPAR has dropped 3.6 percent in the last year. Philadelphia saw a similar boom in hotel construction for the 2016 Democratic Presidential Convention, and a similar decline in revPAR after the convention was done.

In San Francisco, revPAR dropped 2.4 percent after the city’s main convention center, the Moscone Center, closed for a part of 2017. All of these effects, however, are short-term problems.

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