Last year marked the 11th year of this economic cycle, the longest stretch of economic growth that we have ever seen in U.S. history. The good news for the economy in 2020 is that a recession is unlikely barring some shock like war, a terrorist attack or a natural disaster. The bad news is GDP will moderate continuing last year’s trend of gradual slowing. Expect growth of 1.9%, down from 2.3% in 2019 and 2018’s brisk 2.9% pace. The second half of 2020 will be better than the first. Interest rates are still historically low and indications are the Federal Reserve will not be making any changes by either cutting the interest rate or hiking the rate. Inflation remains in check running at about a 2.2% level. There’s ample capital looking for investments. The economy remains in a great place giving no reason to fret about the end of the good times.
Many experts are predicting that 2020 will be very similar to 2019 and that growth will be minor or flat. While occupancy levels are forecasted to decline in 2020 and 2021 the health of the U.S. lodging industry remains strong. Tighter lending requirements and escalating construction costs will curtail the amount of new construction estimated to be 2.2% by Lodging Econometrics. The economy continues to support demand for lodging. With the continued demand and less new supply occupancy levels should remain above 65% for the foreseeable future. The growth in room rates will be very limited for the next couple of years. With limited room rate growth ADR growth and Rev Par growth will be very negligible making it very difficult to grow profits. Adding to this dilemma are the rising operating costs highlighted by rising labor costs, insurance costs and property taxes. The bottom line is expected to be flat or a slight decline for the next couple of years.
Investment remains strong in hospitality. There is no shortage of capital going into lodging on both the debt and equity sides. Acquisition financing is fairly easy to get, construction financing is more difficult, dependent upon the strength and experience of the borrower. We have seen a lot of non-traditional money coming to hospitality from the apartment sector, office sector and high net-worth individuals looking for a better return.
The cost to build a new hotel has increased dramatically it is cheaper to buy an existing hotel than it is to build. Existing hotels will generate cash flow much quicker as it generally takes about two years of planning, a year and a half to build and then two years to ramp up. If you purchase an existing hotel it should cash flow on the day you close.