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Hospitality Industry Update

The Hospitality Industry is at a neutral point. Occupancy rates for 2019 and 2020 are expected to be stagnant to a slight decline. ADR is expected to have a slight increase over the next two years as a result of rising inflation rates. Supply is expected to remain steady averaging slightly over the long term average of 1.8%. Demand will have a slight increase but that is offset by a larger supply increase resulting in the slight decline in occupancy rates.

2019 CBRE
Supply: 2.0%
Demand: 1.8%
Occupancy: – 0.2%
ADR: 1.1%
RevPar: .9%

2019 Smith Travel
Supply: 1.9%
Demand: 1.9%
Occupancy: 0.0%
ADR: 2.3%
RevPar: 2.3%

2020 CBRE
Supply: 2.1%
Demand: 1.3%
Occupancy: – 0.8%
ADR: 2.0%
RevPar: 1.2%

2020 Smith Travel
Supply: 1.9%
Demand: 1.7%
Occupancy: – 0.2%
ADR: 2.2%
RevPar: 1.9%

Interest rates are expected to continue to decline which will help stabilize values as net operating incomes may very well decline. Operating expenses have increased an average of 4% per year over the last several years. Given the top line projections operating expenses will need to be curtailed to a 2% increase in order to obtain the same net operating income. This is going to be very difficult to do in light of the tight labor market, rising insurance costs, taxes, utilities, etc.


The good news is this is just a blip on the radar screen and not a recession. Things are going to slow down but good operators and good properties will be just fine.

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Self Storage Market

Nationally the rise in new supply has both depressed overall rental rates and increased concessions. Stagnant rents are finally dampening the enthusiasm of developers to build new properties. That should help cool down the competition for tenants, and eventually allow rents to grow again. But because the trade area of a self-storage property is so small, properties in different sub-markets of the same metro area may perform very differently from each other. There are submarkets where properties are getting 6 percent to 8 percent rent growth per year, and there are sub-markets with 2 percent to 3 percent declines. It all depends upon your individual market.

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Hospitality Industry Update

We have enjoyed 10 consecutive years of occupancy expansion, but now we are about to enter a period of a slight slowdown.  Demand growth for 2019 is estimated to be 2.0% and for 2020 between 1.1% (CBRE) and 1.7% (Smith Travel).  This is a direct result of the National Economy slowing down.  Demand growth closely follows the National Economy.  Changes in lodging demand growth typically lags the National Economy by one year.  The National Economy is expected to grow by 2.2% in 2019, .7% in 2020 and 1.4% in 2021.  Supply growth is anticipated to continue at the long term average of approximately 1.8% per year.  Occupancy levels will remain relatively flat to a slight decline.  The good news is the anticipated downturn will be slight and short lived.  The recovery should begin in 2022 with a 1.3% increase in RevPar, followed by a whopping increase of 3.8% in 2023.  The rising cost of new construction will limit the growth of new supply.

Smith Travel – 2019                                                                               

Supply:  1.9%                                                            

Demand:  2.0%                                                         

Occupancy:  0.1%                                                    

ADR:  1.9%                                                                 

RevPar:  2.0%                                                                                                                            

Smith Travel – 2020

Supply:  1.9%    

Demand:  1.7% 

Occupancy:  (0.2%)                                                 

ADR:  2.2%         

RevPar:  1.9%    

CBRE – 2019

Supply:  2.0%    

Demand:  2.0% 

Occupancy:  0.0%                                                    

ADR:  1.9%         

RevPar:  2.0%    

CBRE – 2020

Supply:  1.9%    

Demand:  1.1%

Occupancy:  (0.1%)

ADR:  .03%

RevPar:  1.8%

Hoteliers will need to concentrate on revenue management, property maintenance, labor costs, insurance and other expenses to continue to earn strong returns and preserve value while riding out the slowdown.  The limited demand growth cannot keep pace with the modest supply increase.  With the slowdown in the economy rising interest rates aren’t the worry the way they were at the start of the year.  The Fed is likely to dial back rates to help boost the economy.  The Federal Reserve has policy meetings on July 31st and September 18th.  It is anticipated that at one of these meetings the Fed will lower interest rates by a quarter of a point, with two rate cuts likely in 2020.  Financing remains abundant for acquisitions.  Even rehab money and new construction money are available although there is stricter underwriting requirements, a lower loan to value, and slightly higher interest rates for these types of loans.  Values will remain stable as cap rates have stabilized as a result of interest rates stabilizing.  The market has been good for so long that it is much harder to find deals that make sense.  We still have more Buyers than Sellers as it remains a Seller’s market.

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Hospitality Industry

The Hospitality Industry has been enjoying terrific demand growth from all its key drives:  business travel, trade show and conference attendance and tourism for the last ten years.  The market now is comprised of almost 56,000 hotels and approximately 5.28 million rooms and is still firing on all cylinders, reaching all-time highs for 12 month averages in occupancy (66.2%), ADR ($128.27) and Rev Par ($84.98).  According to Smith Travel Research, hotels across the U.S. have reported Rev Par increases over the past 100 consecutive months.  While hotel operators are feeling pressure from increased insurance costs, labor costs and other expenses, hotel metrics are forecast to climb in 2019 led by increases in occupancy (+ 0.4%) to 66.2%; ADR (+ 2.6%) to $129.00 and Rev Par (+ 3.0%) to $86.00.

Lodging Econometrics reported strong increases in supply, with the addition of 1,086 hotels and 125,614 rooms in 2018, a 10% increase over 2017.  New rooms are always a concern but because new demand, in general will continue to exceed new supply through 2019 this should not be a concern, although there are some markets that are overbuilt.  While growth should continue across all segments, the highest growth for 2019 is expected in the independent segments (+ 2.5%) followed by midscale, upper midscale and upscale.

Transactions in 2018 were up as compared to 2017 with cap rates remaining steady.  The only limiting factor to more hotel transactions is the lack of hotels for sale.  Both equity and debt are available for good, solid transactions.  Nationally, full service hotels are selling at a cap rate of 8.1%, while limited-service hotels are selling at a cap rate of 8.8%.  The outlook is stable, with an at-most increase of up to 25 Basis Points.

Terry Baltes 

 

                                                                                                 

                                                                                              

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Multifamily Industry Update

The U.S. economy will keep growing.  But the pace is clearly starting to slacken as the boost from last year’s tax cuts starts to fade and the slowing global economy weighs on the U.S.   Figure on GDP growth of 2.5% or so, a noticeable step down from 2018’s 2.9% rate.  And the economy could flag by year-end.  Don’t be surprised if growth in the fourth quarter slips below 2%.  With so few workers to hire, firms will be hard-pressed to increase their output much unless they can figure out how to get more efficient with their existing workforces, a challenge lately.  Look for the jobless rate to fall to a slender 3.4%.  We expect the Federal Reserve to raise rates twice over the course of 2019, taking the bank prime rate to 6% by December.  Long term rates are a different story, though.  They may rise in the middle of the year before pulling back by the end of 2019 to near 3%, not much higher than now.  Investors who are worried about an economic slowdown or recession in 2020 or 2021 will buy up Treasuries as a safe haven, which will keep yields fairly low.  Rate hikes and slowing growth will keep inflation muted at 2.3% in 2019.

In an increasing interest rate environment with flat cap rates multifamily investors are looking more at secondary and tertiary markets such as ours in order to achieve their desired returns.  We are also seeing many real estate investors from other asset classes looking to purchase multifamily assets because of its recession resistant nature.  Many investors look at multifamily investing as similar to purchasing long term bonds.  Their belief is that as long as you have professional management and competent maintenance your investment is very safe.  The lack of easily available construction capital, or at least tighter standards for new construction is likely to be a self-correcting phenomenon for restricting new supply.  This coupled with the high increase in construction costs has caused many investors to switch from development mode to acquisition mode which bears well for existing multifamily assets.

There has been an increased demand for class B and C apartments by investors as the retention rates for the new shiny apartment communities tends to be low.  With less than half of the residents opting to stay when their leases expire.  Such turnover results in high expenditures for marketing and unit make-ready in order to attract new residents.  In short, net operating income is low if vacancies are high. 

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Self Storage Industry

 The U.S. economy will keep growing.  But the pace is clearly starting to slacken as the boost from last year’s tax cuts starts to fade and the slowing global economy weighs on the U.S.   Figure on GDP growth of 2.5% or so, a noticeable step down from 2018’s 2.9% rate.  And the economy could flag by year-end.  Don’t be surprised if growth in the fourth quarter slips below 2%.  With so few workers to hire, firms will be hard-pressed to increase their output much unless they can figure out how to get more efficient with their existing workforces, a challenge lately.  Look for the jobless rate to fall to a slender 3.4%.  We expect the Federal Reserve to raise rates twice over the course of 2019, taking the bank prime rate to 6% by December.  Long term rates are a different story, though.  They may rise in the middle of the year before pulling back by the end of 2019 to near 3%, not much higher than now.  Investors who are worried about an economic slowdown or recession in 2020 or 2021 will buy up Treasuries as a safe haven, which will keep yields fairly low.  Rate hikes and slowing growth will keep inflation muted at 2.3% in 2019.

In an increasing interest rate and flat cap rate environment self-storage investors are looking more at secondary and tertiary markets such as ours in order to achieve their desired return.  We are also seeing many real estate investors from historically mainstream asset classes starting to look at self-storage as the asset that can still deliver their desired returns.  Because multi-family and other asset classes are being priced higher and higher with cap rates moving lower and lower, prices have skyrocketed.  As a result these investors are looking to self-storage assets. 

The lack of easily available construction capital, or at least tighter standards for new construction activity is likely to be a self-correcting phenomenon for restricting new supply for self-storage assets.  This coupled with the high increase in construction costs has caused many investors to switch from development mode to an acquisition mode which bears well for existing self-storage facilities. 

             

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Hospitality Industry

The U.S. economy will keep growing.  But the pace is clearly starting to slacken as the boost from last year’s tax cuts starts to fade and the slowing global economy weighs on the U.S.   Figure on GDP growth of 2.5% or so, a noticeable step down from 2018’s 2.9% rate.  And the economy could flag by year-end.  Don’t be surprised if growth in the fourth quarter slips below 2%.  With so few workers to hire, firms will be hard-pressed to increase their output much unless they can figure out how to get more efficient with their existing workforces, a challenge lately.  Look for the jobless rate to fall to a slender 3.4%.  We expect the Federal Reserve to raise rates twice over the course of 2019, taking the bank prime rate to 6% by December.  Long term rates are a different story, though.  They may rise in the middle of the year before pulling back by the end of 2019 to near 3%, not much higher than now.  Investors who are worried about an economic slowdown or recession in 2020 or 2021 will buy up Treasuries as a safe haven, which will keep yields fairly low.  Rate hikes and slowing growth will keep inflation muted at 2.3% in 2019.

In an increasing interest rate and flat cap rate environment hotel investors are looking more at secondary and tertiary markets such as ours in order to achieve their desired return.  We are also seeing many real estate investors from historically mainstream asset classes starting to look at hospitality as the asset that can still deliver their desired returns.  Because multi-family and self-storage asset classes are being priced higher and higher with cap rates moving lower and lower, prices have skyrocketed.  As a result these investors are looking to hospitality assets.

Hotel supply is expected to increase by 1.9 percent in 2019 slightly less than the 2.0% long term average that 2018 experienced.  The robust economy continues to drive demand which is estimated to grow by 2 percent in 2019.  This will make the 10th consecutive year of occupancy growth for the U.S.   Occupancy levels are now at record highs.  The only concern is the lack of ADR growth which is forecasted to be about 2.5 percent in 2019.  RevPar is expected to increase by just 2.6 percent in 2019.  The key moving forward is to keep operating expenses under control.  The increase in operating expenses, will have to be under 3 percent in order to maintain the same return.  The biggest culprit is rising labor costs.  The scarcity of labor has led to rising wages which will squeeze profit margins.

The lack of easily available construction capital, or at least tighter standards for new construction activity is likely to be a self-correcting phenomenon for restricting new supply for hospitality assets.  This coupled with the high increase in construction costs has caused many investors to switch from development mode to an acquisition mode which bears well for existing hotels.

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Hospitality Industry

Hotel Revenues are predicted to continue to rise albeit at a lower pace than we have enjoyed over the recent years.  Demand growth will continue to exceed new supply levels through 2019.  Supply growth is expected to peak at around 2.0% in 2018 and then stabilize at the long run average of 1.9% for the next two years.  The rising costs of new construction resulting from trade war tariffs and labor costs are causing new construction costs to skyrocket.  The increased construction costs and rising interest rates will temper the amount of new supply helping us to avoid being overbuilt on a national level.  But there are individual submarkets that are already suffering from an oversupply of new construction.

We have enjoyed eight years of demand growth and record occupancy levels making the hotel sector one of the best investments over the last decade.  The party is still not over.  The celebration may not be as exuberant as it has been but it will still be fun.  Demand is projected to increase at 1.9% with a 2.6% gain in ADR for 2019, still very solid numbers.  There is still a lot of capital both debt and equity chasing deals as the economy continues to be very robust.

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Multifamily continues to be the darling of the investment community….

Multifamily continues to be the darling of the investment community based upon its solid market fundamentals and its long term positive outlook.  Substantial capital, both debt and equity are readily available for this sector because of its long term sustainability.  Rents have been rising, cap rates have been depressing although at a slower pace, sales prices per square foot have been increasing and new product has been kept in check.  The vacancy rate has ticked up slightly which is the only negative.  The biggest risk that is looming is rising interest rates.  As interest rates rise so do cap rates, and values fall.  The big question is can rental rates and occupancy rates rise faster than interest rates.

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The Self Storage market continues to thrive……

The Self Storage market continues to thrive with significant capital both debt and equity readily available.  Rents have been increasing, cap rates have been compressing, sale prices per square foot have been increasing, new construction has been limited and vacancy rates have been declining.  The only looming concern is interest rates.  As interest rates tick up so do cap rates, decreasing the value.  The only question is can rental rates and occupancy rates rise fast enough to offset the negative effect of rising interest rates.

Many investors are turning away from the traditional real estate sectors of industrial, multifamily, office and retail.  For both the industrial and multifamily sectors the competition to buy has driven cap rates down to an unacceptable level for many investors.  The office sector is less desirable because of the extensive tenant fit up required by the landlord when signing a new tenant.  The retail sector is in a free fall as a result of Amazon and On-Line Shopping.  This leaves the Self Storage Sector which is the youngest of all real estate niches, having only begun in 1960’s and 1970’s in any meaningful way.

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