FOR ANYBODY PREDICTING that the current hotel market cycle is peaking, the strong U.S. economy and prudent lending practices are keeping it running a little longer, according to real estate and lending analytics company Trepp and Commercial Real Estate Direct’s The Mid-Year 2018 report. Fears of oversupply are being overridden by recent tax cuts, Trepp’s experts say, and lenders are feeling free to finance further growth.
Last year, $24.9 billion in commercial mortgage-backed securities were issued to lodging properties in the U.S., according to Trepp, including $16.8 billion in single-asset/single-borrower deals. That amount was substantially higher than the previous record for CMBS issued to lodging properties, $11.4 billion in 2015. So far this year, hotels have received $10 billion in CMBS investment.
The strong U.S. economy seems to have overcome concerns of overbuilding, said Geraldine Guichardo, Americas head of hotels research for commercial real estate services provider JLL.
“Lodging fundamentals continue to grow,” she said. “Recent indicators suggest the economic expansion is only accelerating and the economic effects of the recently passed tax legislation have yet to be felt.”
RevPAR for U.S. hotels is expected to continue growing through 2018 into next year, leading STR and CBRE Hotels’ Americas Research to revise their forecasts for the year upward. CBRE increased its RevPAR forecast for the year from 2.5 percent to 2.8 percent, and STR’s RevPAR forecast rose from a 2.2 percent increase to an expected 2.7 percent increase, ending at $85.82 with occupancy rising to 66.1 percent.
The numbers are helped by a slight decrease in construction of new hotel rooms. The number of rooms under construction declined in six of the last seven months through April and overall construction activity was down 2.2 percent from last year, according to Trepp. Demand in the first quarter rose 3 percent over last year while supply increased only 2 percent.
However, overbuilding did impact some individual markets, said STR’s Senior Vice President of Lodging Insights Jan Freitag. Nashville, Tennessee, for example, saw a 67.5 percent increase in its number of rooms under construction over 2016, leading to a drop in occupancy that caused the local government to pass an ordinance phasing out short-term rental permits in residential neighborhoods. “There are still some markets where they did not get the memo,” Freitag said.