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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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Dayton sees new hotel room explosion: What’s really going on

The combined 675 new hotel rooms planned for six new buildings in the Dayton area are another sign of a healthy economy that boasts low interest rates and high consumer spending.

“The economy is very good right now and hotels are a real estate asset. They’re basically a business with a lot of real estate. So as the economy goes, so goes the hotel industry,” said Terry Baltes of Baltes Commercial Real Estate, which specializes in hotels.

He said right now “it’s good to be a hotel owner,” with interest rates at historic lows and both hotel occupancy and average daily rate at all-time highs.

This year, the national average cost of a hotel room will increase 2.4 percent, demand will increase 2.3 percent and supply will increase 2 percent, according to Smith Travel Research.

Dayton will have a good balance of hotel rooms when the current projects are done, Baltes said, improving a shortage of quality hotel rooms the region has seen since the recession. There’s a phrase in the hotel industry, “it’s not oversupplied, it’s underdemolished,” Baltes said.

“It’s not that we had too many rooms,” Baltes said. “It’s that we didn’t have the right kind of rooms.”

Many area hotels that have closed in the last decade haven’t done so because there wasn’t enough demand, Baltes said. Instead, the old buildings weren’t cost efficient anymore and didn’t have what consumers wanted with outdoor entrances that felt unsafe and fewer amenities.

“Consumer demands have really changed. They want all the amenities they have at home,” he said. “They want the big flatscreen TV; they want a hot breakfast in the morning.”

The most recent new hotel plan is by developer Shaun Pan, who said he is waiting to hear back from the Hilton franchise about his request to build Dayton’s first dual hotel. The $15 million to $20 million project would offer 100 rooms of Hampton Inn & Suites and about 75 rooms of Home2 Suites at a location off Edwin C. Moses near Elizabeth Place.

Dual-brand hotels are growing in popularity because they offer short-term and extended stay options in one location, which attract multiple types of clientele and can cut costs because of shared amenities, facilities and overhead, industry groups say.

South Edwin C. Moses already has several hotels. Just down the road, a new $8 million Holiday Inn Express is being built on three acres of land on the 2100 block of Edwin C. Moses and will have about 95 rooms. It adds to the existent Marriot at the University of Dayton and the Courtyard by Marriot.

And that’s not all.

Downtown Dayton will get its first new hotel in decades in the booming Water Street District. The Fairfield Inn & Suites will have about 98 rooms at East Monument and Patterson Boulevard.

Outside of Dayton several other hotels in suburbs are in the works as well. A permit was filed in June for a new WoodSpring Suites on Maxton Road in Butler Twp. at Miller Lane; a Tru by Hilton hotel was proposed for the south side of Colonel Glenn Highway near the Beavercreek Meijer and an application was filed to build a 100-room Home2 Suites hotel near the Mall at Fairfield Commons in Beavercreek.

The market will absorb the current plans, Baltes said. Dayton is right at the crossroads of Interstates 70 and 75 and Wright Patterson Air Force Base continues to grow and add employees, leading to a good market for these hotels.

Aside from the initial construction investment, new hotels continue to drive the economy by attracting new conventions and large events to the city.

“Lot’s of times when there are major events in town, whether a company chooses to book in Dayton, Ohio, or not depends on how many rooms are available,” Baltes said.

If the construction continues at this pace, though, there will be a surplus. But Baltes said he doesn’t foresee that problem because the new developments will slow soon as interest rates approach normal levels and construction costs continue to rise.

“A lot of these deals are being done because there’s cheap money out there, on both the equity side and the lending side, and I think when interest rates get to normal levels, these deals will not make sense…some of these projects that are in the pipelines probably won’t come to fruition.”

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The Hotel Sector continues to perform better than expected.

The Hotel Sector continues to perform better than expected. According to STR data, U.S. hotels saw a 3.5 percent increase in revenue per available room during the first quarter of 2018. This exceeded the 2.5 percent increase that was widely predicted. The demand growth in the first quarter of 2018 marked the 33rd consecutive quarter of demand growth. Looking forward to 2019 the experts predict another year of occupancy growth that will mark 10 consecutive years of increases in occupancy and 5 consecutive years of record occupancy levels.

2018 Forecasted Increases
SupplySTR: 2.0%    PwC: *
DemandSTR: 2.3%    PwC: 2.0%
OccupancySTR: .3%    PwC: .1%
ADRSTR: 2.4%    PwC: *
Rev ParSTR: 2.7%    PwC: 2.4%

Hotel supply growth is expected to grow 2.5 percent in 2018, according to Lodging Econometrics equating to 1,146 hotels with 130,877 new rooms. Of those expected to open, 511 hotels with 50, 105 rooms will be uppermidscale, the highest count of any chain scale and 45 percent of all new openings.

It is a great time to be a Hotelier in the United States as the economy will be approaching a record 10 years of consecutive growth in 2019. If this holds true this will be the longest consistent economic growth for the United States surpassing the “Roaring 1920’s” era. As a result of such a bright future we have all kinds of Buyers wanting to purchase hotels. Some of these Buyers are coming from different industries as they need to deploy their money. Many of them are all cash buyers or are needing a replacement property to finish their 1031 tax deferred sale.

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Things continue to be very good in the Hospitality Sector.

Prices keep rising for Hospitality Properties, forcing investors into smaller markets as Buyers chase yield. Things continue to be very good in the Hospitality Sector. The amount of money Hospitality investors are spending has stabilized at a high level. Investors continue to accept relatively low yields on their acquisitions even though interest rates have risen and are expected to rise more. Eventually this should have an effect on pricing.

It is anticipated that the supply of new hotel rooms will peak in 2018 at approximately 100,000 new rooms. This would be the largest number of new rooms since 2009. Overall the increase in new rooms will be approximately 2.0 percent which has been the long term average. The addition of the new supply will cause occupancy to slightly decline in 2018 but the good news is the anticipated increase in ADR should offset the decline in occupancy rate resulting in an overall increase in Rev Par.

Looking forward the Hospitality Sector continues to have a very bright future. The year 2017 was the eighth consecutive year of increasing profits. Annual Rev Par gains are projected to increase over the next couple of years albeit at a slower rate than the last few years. Keeping expenses under control will be paramount as we enter a period of positive but slower Rev Par growth.

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