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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.


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.


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.


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.


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.”


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.


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.


Self-Storage Market

The self-storage landscape in the U.S. is changing as many households store excess items in storage facilities.  Over the past 40 years, the self-storage industry has proven to be one of the sectors with the most rapid growth in the U.S. commercial real estate industry.  The unprecedented growth of the industry has been attributed to self-storage consumers including renters, homeowners, students, businesses and transitional populations who are constantly demanding rental storage.  Self-storage units are growing so fast that in 2016 there were more than 58,000 self-storage facilities in the U.S. with a total of 32 million storage units covering over 2.3 billion square feet of storage space.  As the U.S. population has increased their rental storage by more than 10% within the last 20 years, the self-storage industry has also grossed over $30 billion in revenue.  A demand study reported that the number of renters who used storage facilities in 2007, almost doubled by 2013, and 2 million out of 17 million renters reported that they would most likely rent in the future.  According to the IBS World, self-storage revenue will grow at an annual rate of 2.9% through 2020.  Based on IBIS World’s forecast, self-storage facilities will have a growth rate of 14% by 2020.  To keep you informed of the market conditions we have outlined below the average price of a storage unit and the average price per square foot for Cincinnati, Cleveland, Columbus, Dayton and Toledo for the years of 2014, 2015, 2016 and 2017.  For 2017 Cincinnati had the highest price per unit while Cleveland had the highest price per square foot.  On the low end for 2017 Toledo had the lowest price per unit while Columbus and Dayton were tied for the lowest price per square foot.


Average Price Of A Storage Unit

Cincinnati – 2014:  70.95     2015:  76.35     2016:  74.59     2017:  74.25

Cleveland – 2014:  71.37     2015:  61.10     2016:  68.36     2017:  70.25

Columbus- 2014:  70.42     2015:  67.25     2016:  68.91     2017:  69.79

Dayton – 2014:  66.54     2015:  58.91     2016:  62.23     2017:  64.65

Toledo – 2014:  57.38     2015:  62.34     2016:  68.69     2017:  63.38

Average Price Per Square Foot

Cincinnati – 2014:  $0.74     2015:  $0.85     2016:  $0.92     2017:  $0.87

Cleveland – 2014:  $0.80     2015:  $0.87     2016:  $0.82     2017:  $0.90

Columbus – 2014:  $0.74     2015:  $0.72     2016:  $0.76     2017:  $0.76

Dayton – 2014:  $0.71     2015:  $0.69     2016:  $0.71     2017:  $0.76

Toledo – 2014:  $0.77     2015:  $0.86     2016:  $0.90     2017:  $0.93


The Multifamily Market…  

The multifamily market is seeing a move toward better value assets as investors search for better returns.  Class A communities have seen a drop in demand from investors and end users alike, as prices have risen lowering returns.  Buyers have begun to adjust their investments as they feel there are better returns in the B and C asset classes.  Older properties have proven themselves to be more or less recession-proof, whereas newer properties can easily become a liability under the same economic conditions due to higher rental rates and expenses due to additional amenities.  Class A assets are usually located in prime communities therefore demanding higher rents than their counterparts, but if demand should slip or vacancies go up, the NOI will go down.  Also renters start getting priced out in a changing economy, so investors will find returns with Class B and C assets will increase as they are hit less in a down economy.  The cost for construction has also seen an upward shift over the last few years so building Class A assets has become a bit of an issue.  They usually come with a higher tax bill as well.  According to the Wall Street Journal Class A construction is at a 7 year peak so we may run into an oversupply shortly.

Class B & C properties are attracting a wide demographic, from working class individuals to millennials entering the market to downsizing baby boomers.  They tend to offer residents the most bang for their buck, and are attractive to more renters in a down economy.  The typical Class B/C properties are around 15 to 25 years of age, and are located in desirable buildings in well-established middle income neighborhoods.  Class B and C properties allow real estate investors to enjoy a significant lift in NOI by making small property improvements.  Examples of these value adds include putting in stainless steel appliances, new cabinets, communal clubhouses, adding dog parks, laundry facilities in the unit and offering community events.  These upgrades to B and C apartments can be relatively inexpensive to implement, yet can generate higher rents, leading to rapid ROI growth.

In 2017 the Greater Dayton Market saw 1,094 new units delivered primarily in the downtown, Fairborn/Huber Heights and Centerville/Miamisburg Areas.  Occupancy ended the year at 95.3% down just .4% from 2016’s occupancy rate of 95.7%.  The net absorption in 2017 was 114 unites.  There are currently 1,676 units under construction.  The Beavercreek/Bellbrook submarket is by far the most affluent in Dayton, largely thanks to its proximity to high paying jobs at Wright Patterson Air Force Base, thus commanding substantially higher rents than the rest of the market.  The second most expensive submarket is the Centerville/Springboro area.


As we enter the ninth year of recovery….

As we enter the ninth year of recovery since the Great Recession occupancies are at a record level of 65.9 percent.  The average occupancy level over the past 30 years has been 62.3 percent.  Year over year occupancy grew by an average of 0.2 percent during this period.  Since 1987, hotel supply has increased by 72.3 percent.  Meanwhile, during that same period, demand increased 78.5 percent.  Thus creating the current market we are all enjoying where demand has exceeded supply.  Driving this increase demand is the weekend traveler.  Weekend occupancy is now 9 points higher than weekday occupancy and as expected weekend ADR is higher than weekday ADR.  Smith Travel Research reports the occupancy for 2016 was 65.4 percent and for 2017 it was 65.9 percent.  The ADR for 2016 was $124.13 and for 2017 it was $126.72.  The Rev Par for 2016 was $81.15 and for 2017 it was $83.57.  All three were up as compared to the previous year.  Lodging Econometrics estimates there are 1,146 projects with 130,633 rooms in the pipeline for 2018 and 1,153 projects with 134,900 rooms in the pipeline for 2019.

Continued growth is forecasted for the hotel industry although at a slower pace than recent years.  Occupancy for 2018 is expected to increase just 0.1 percent with a 2.3 percent jump in ADR and rev par gain of 2.4 percent.  The deceleration in the rate of occupancy growth is due to the influx of new supply.

Occupancy:     2016:  65.4%           2017:  65.9%           2018 Projected:  66.0%

ADR:                  2016:  $124.13        2017:  $126.72        2018 Projected:  $129.63

Rev Par:           2016:  81.15             2017:  83.57             2018 Projected:  85.58

The year 2015 is considered by many to have been when the market peaked and that we could even be back at the beginning of a new cycle.  The experts predict smooth sailing ahead for the hotel industry.

It continues to be a Seller’s market as we have more Buyers than Sellers.  Prices are high, financing is available and interest rates remain historically low.