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Is the Hotel Sector Due for a Setback?

Is the Hotel Sector Due for a Setback?

Given Anbang’s and Marriott’s multibillion dollar bidding war for Starwood Hotels & Resorts, it would seem that U.S. hotel properties continue to be viewed as a great investment.

Hotels set a record for occupancy in 2015 and performed well in 2014.

But will we see the same strength in 2016 and 2017? Analysts have pointed to employment increases as a sign of an improving U.S. economy, but will another sign of a stronger domestic economy—the growing value of the U.S. dollar—negatively impact the U.S. hospitality industry? And what of troubled economies abroad, including in Europe and Asia Pacific? These developments are sure to have consequence, but it may be too early to tell the full depth of the effect on U.S. hotel assets.

Additional challenges the hotel sector will see in 2016 will be in fewer visitors to markets reliant on energy companies, according to Justin Knight, president and CEO of Apple Hospitality. Knight also notes that markets that depend heavily on foreign travel will be affected by the strengthening U.S. dollar.

Following a record

“All-time highs in occupancy and average daily rate” made 2015 a record year for revenue per available room (RevPAR), according to Moody’s. In 2015, RevPAR grew 6.3 percent over 2014, according to Moody’s February 2016 report “Robust 2015 Hotel Performance Masks Signs of Softening.” But that growth rate is less than the 8.3 percent seen the year before. Moody’s points to the fourth quarter of 2015 (when RevPar posted year-over-year growth of 4.8 percent) as “a good indicator” of the performance of hotels this year.

Looking at the numbers, it seems 2016 began much as 2015 ended.

“The hotel sector is seeing somewhat slower growth in the first quarter as compared to the first quarter of 2015, but growth is anticipated to accelerate in the second and third quarters,” Knight says.

So far in 2016, demand is on track to match and even outpace available supply. “To date, supply growth on a national level has been below the long-term averages and demand continues to outpace supply in the majority of markets,” Knight says.

Looking forward at 2017, however, Moody’s researchers do worry about oversupply. “As supply continues to gain momentum and growth in demand slows down, we expect that supply and demand will reach equilibrium in the next 12-18 months before tipping the scale to where supply growth exceeds demand increases,” the firm’s researchers write.

The hotel sector has been seeing a spike in new supply coupled with deceleration of year-over-year RevPAR growth year-to-date in 2016, according to Moody’s sources. Supply is increasing in gateway cities around the U.S., including New York, San Francisco, Miami and Seattle.

“To date, supply growth has been heavily concentrated in high density urban markets,” Knight says.

In 2016, 865 new hotels will be delivered in the U.S., totaling 103,230 rooms, according to hotel data firm STR.

Here come the tourists?

In the second quarter of 2014, the number of international visitors to the U.S. saw an 11.9 percent increase over the second quarter of 2013. According to the most recent quarterly data available from the National Travel and Tourism Office, the second quarter of 2015 saw only a 4.0 percent increase over comparable period in 2014. This marks an 8.0 percent drop in tourism growth that could be attributed, at least partly, to a stronger dollar.

Gateway cities should experience the least impact from weaker international tourism, as these are the markets on many tourists’ must-see list.

“Lodging demand for U.S. gateway cities may be less impacted even if global economy were to slow as a bigger middle class globally can have somewhat of an offsetting effect,” says Eun Jee Park, vice president and senior credit officer at Moodys, adding that “big-picture wise, gateway cities benefit from both domestic and international demand.”

“A record number of tourists visited New York City in 2015, and city officials expect more in 2016, in spite of slowing economies in some places and a stronger dollar,” says Jay Rosen, vice president and senior analyst at Moodys.

But Knight adds that new hotel growth has outpaced demand in cities including New York and Houston.

The online platform in the room

For the time being, oversupply remains more of a threat to the hotel sector than online home sharing site Airbnb, according to Moody’s, which expects the platform will grow but will have to tackle legal and regulatory issues.

In the firm’s March 2016 report, “Airbnb Growth Poses Minimal Threat to Traditional Lodging Sector,” Moody’s researchers contend Airbnb will attract some customers that would otherwise use hotels, but that “supply/demand imbalance from hotel over-building is a greater competitive threat to the traditional lodging sector in CMBS.”

"Airbnb is relatively new and we are watching how its platform develops. Long-term, its impact is in question,” says Knight. “Airbnb seems to have the largest presence in higher-density urban markets, with impact seen mostly around major events or high-occupancy nights.”

Travelers who book through Airbnb are staying for longer than one night and more Airbnb stays happen in the nation’s largest cities, according to Moody’s, which found that “10 U.S. markets account for about 40 percnet of Airbnb bookings.”

Factors that contribute to Airbnb’s growth include competitive pricing, location and experience. “A recent survey conducted by Morgan Stanley found that for 55 percent of people who either have used Airbnb or intend to, price is the most important factor…The second and third most cited reasons were location (33 percent) and authentic experience (percent)” Moody’s reports. By its very nature, Airbnb poses less of a threat to full-service amenity-rich hotels than it does to a bed-and-breakfasts, for instance.

Mega-deals in the works

Late last week U.S. hotel operators Starwood Hotels & Resorts tentatively accepted a binding cash bid for $13 billion from Chinese insurer Anbang. But a higher offer made by Marriott for $13.6 billion changed the game, with Starwood agreeing to accept Marriott’s increased bid. Until the merger is finalized, however, all bets are off. “There is a bidding war, in my opinion,” Knight says.

“Because the hotel sector has done so well after the financial crisis you see these big deals going on,” Park says.

Marriott’s interest in Starwood is “not surprising,” according to Knight, given the value in Starwood’s brand, reservation system and loyalty program, but there are “lots of questions” about how the Starwood deal will go.

In the wake of Anbang’s initial offer, Moody’s released a note calling the potential acquisition a “credit negative” that would result in Starwood being highly leveraged—an echo of the deals made during the previous boom.

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