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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.


Apartment Industry Update….

There is a considerable amount of new construction in the market.  Eight Hundred new units were finished last year and an additional 1,475 are in some stage of planning or construction.  The new construction is primarily Class A product with high end amenities.  They are attracting the empty nester and baby boomers who are downsizing as well as young professionals who are choosing to rent.  The 800 units that were built last year were quickly absorbed as the overall market was 97% occupied in the first half of this year.  It will be interesting to see how quickly the market absorbs the coming 1,475 units.  Older existing Class B apartments built in the 70’s, 80’s and even 90’s which have been renovated will remain in high demand as the math does not work for developers to build Class B units.

Transactional volume is down year-over-year.  The issue isn’t finding a multifamily property, but finding one that makes financial sense.  The problem is many investors are looking for the same thing, a newer property or an older property that has been completely renovated.  To keep you informed of the value of your units we have attached a list of the more noteworthy sales completed in our market year to date.

We will probably see some pullback in our market in 2018, compounded by a slowing of rent escalations.  That’s normal and nothing to be alarmed about.  Overall, it looks like 2018 is going to be another successful year.  We have REIT’s, Institutional Buyers, National and Local Buyers all looking to purchase.


The Self-Storage Industry….

The Self-Storage industry was virtually non-existent before 1970. Today we have over 58,000 self-storage facilities in the United States comprising approximately 2.35 billion square feet. The self-storage industry is one of the youngest industries in the commercial real estate field. While the industry feels it is consolidating very quickly with all the recent acquisitions by REIT’s and large institutional investors the data speaks differently. REIT’s account for approximately 13.4 percent of the facilities in the nation. There is a group of the 100 top owners who account for an additional 10.8 percent. This leaves approximately 76 percent of self-storage properties being held by smaller regional and local owners. The REIT’s and large institutional investors are very selective in the assets they choose. Their strict set of requisites opens the door for competition from groups, regional owners and local owners who are willing to pay competitive prices. The REIT’s and large institutional investors typically look for facilities with 50,000 to 80,000 rentable square feet in densely populated areas in large metropolitan areas. On the development side of the 387 recent self-storage completions nationwide only 5.7 percent have been shown to be backed by REIT’s or large institutional investors.

While REIT’s and large institutional investors continue to acquire large portfolios there is plenty of competition from private equity firms, regional and local buyers. We have numerous Buyers including the REIT’s, Regional and Local Buyers who are anxious to purchase.


It continues to be a Seller’s Market….

It continues to be a Seller’s Market, even after being in this cycle for over nine years.  Everything that we have been marketing is selling.  Demand continues to be very strong for quality assets especially for premium branded select service hotels.  Also in high demand are assets with a perceived value add.

Buyers are still confident that the Government will be successful in implementing policies for infrastructure spending and tax reform that will be a boost for overall economic growth, including the hotel industry.  In addition financing for existing hotels remains readily available at historically low interest rates.  All of which drives demand.

There is still a lot of money looking to be placed in the hotel sector both on the debt and equity side.  Virtually every type of investor ranging from private equity funds to institutional investors, to REIT’s, as well as individual buyers are actively looking to purchase hotels.  We have been successful in securing multiple offers for our sellers to pick and choose from.  Many of these Buyers have not found anything to purchase and are still actively looking.


The construction boom continues for hotels. 

It seems everywhere you look there is a new hotel being built.  In June of this year there were 191,000 new hotel rooms under construction nationwide.  That’s up by 16 percent compared to the same period last year.  That rate of growth is not as fast as it has been in recent years but the inventory is still growing.  The good news is that the growth in demand is basically on par with the supply of new rooms according to Smith Travel Research.  Of course this can vary by individual markets with some markets being over supplied and some markets under supplied.  Obviously the trick is to find the undersupplied markets.

With all the new construction, not just for hotels but virtually every sector of real estate, construction costs have gone up by 20% over the last two years.  Most of this is driven by labor costs which has risen by 35-40 per cent, while material costs have increased by 10 per cent over this same period.

The number of hotel properties sold in the first five months of 2017 is down by 14 percent compared to the year before.  The year started very slowly but has begun to recover.  The biggest reason sales are down is there is a lack of inventory.  Owners are concerned about selling because there is nothing to buy.  We talk to owners everyday who say they would like to sell in this Seller’s market but they can’t afford to pay the capital gains tax and want to do a 1031 tax deferred exchange.  They know their hotel will sell but they aren’t willing to put their hotel on the market until they have something lined up to purchase.

Prices for existing hotels has risen dramatically as it continues to be a Seller’s market.  We have all types of Buyers including “All Cash Buyers” who are anxious to purchase.


29th Annual Hunter Hotel Conference

I recently had the pleasure of attending the 29th Annual Hunter Hotel Conference on March 22nd, 23rd and 24th in Atlanta, Georgia and wanted to share with you some of the thoughts from the Industry’s Experts.

President’s Panel

We still don’t know the final outcome of the Marriott/Starwood Merger.  A strong brand is one that connects with the consumer and has a vision.  Consumer preferences constantly change.  A lot of brand blur.  There are too many brands, the consumer is confused.  The best measure of a brand is when the industry is in a trough.  As an owner you are paying twice for a customer, Franchisor and the OTA’s.  The question is who owns the customer.  If there is a storm you can probably survive with 35% equity and 65% debt.  Three interest rate hikes this year and 3 more next year.

State Of The Industry

Not a lot of clarity in the market.  Transaction volume in 2016 was off by 40% compared to 2015.  Cap rates are up by 150 basis points since the 2014 cap rate of 7.0.  The market is not very liquid.  Fifty percent of all new construction is just in 4 markets, New York, Dallas, Boston and Nashville.  Residence Inns and Hampton Inns are in their own league as far as investment returns.  Select Service Hotels provide a very stable cash flow.  There is a 600 basis point difference between a Select Service Hotel return and the 10 year Treasury Bond.  There is more capital than product to buy.

Statistically Speaking

Occupancy will have a slight decline due to supply exceeding demand.  We have had 84 months of RevPar Growth and it is expected we will enjoy another 2 years of RevPar Growth due to ADR Growth, not occupancy.  Transient is considered 1 to 9 rooms, group 10 or more.  This year we will sell more rooms than ever before, but we have more rooms than ever before.  Two thirds of the new rooms being built are upscale and upper upscale, not building the big box full service hotels.  Airbnb occupancy is highest on the weekends.  Airbnb runs about a 50% occupancy.  Fifty percent Airbnb stays are 7 days or longer.  Labor costs will continue to rise due to the low unemployment rate.  Occupancy year to date is down by 1.2%.  People are still traveling they just have more options now, more rooms and Airbnb.  Fifty-five percent of transient business is booked because of loyalty programs.  Job growth is what drives demand for hotel rooms.  Brands are like swim lanes in a large pool.  Marriott with its acquisition of Starwood has 30 brands.  Courtyard has been named number one in guest satisfaction.  Marriott opens a new hotel every 14 hours across the world.  Marriott has over 100 Million Royalty Members, adding one million new members every month.  Guests prefer to communicate with the hotel staff by texting versus a phone call.  The guest can respond at their convenience.  The way to overcome the effects of the








OTA’s is to exceed the guest’s expectations.  Rate of change is happening quicker than ever.  Change in retail brands, some former iconic brands don’t exist now.  Average cap rate in 2016 was 8.5%.  We are at peak values.  Slight RevPar growth decline for the next couple of years.  Thirty six percent of the transactions last year were purchased by foreign capital.


U.S. Forecast

Supply             Long Run Avg  1.9%          2017 CBRE  2.0%    2017 STR  2.0%      2018 CBRE  2.1%    2018 STR  2.2%

Demand          Long Run Avg  2.0%          2017 CBRE  1.9%    2017 STR  1.7%      2018 CBRE       1.8%    2018 STR  2.0%

Occupancy     Long Run Avg  62.00%      2017 CBRE  65.4%  2017 STR  -0.3%     2018 CBRE  65.1%  2018 STR  -0.2%

ADR                  Long Run Avg  3.0%          2017 CBRE  3.1%    2017 STR  2.8%      2018 CBRE  2.9%    2018 STR  2.8%

RevPar             Long Run Ave  3.2%         2017 CBRE  3.0%       2017 STR  2.5%      2018 CBRE     2.5%    2018 STR  2.6%

Transaction volume last year was 36 Billion Dollars.  Starwood Brands are now more valuable, now that they are under the Marriott Banner.  Hilton and Marriott are the twin 800 pound gorillas.  Full service cap rates have ranged from 7.1 to 7.6% over the last 6 years.  Cap rates are increasing as a result of the increase in interest rates and slowing RevPar Growth.  Cap rates are expected to increase by a half point.  Financing is getting more difficult especially for new construction.  Private Equity has a lot of cash sitting on the sidelines.  REIT’s have a lot of cash as they have sold a lot of their assets.  A lot of new development is being cancelled because of high construction costs.  Construction costs are based more upon square footage than the finishes.  Midtier markets offer more potential than high profile markets.

Buying And Selling Hotels In An Active Market

Eighty percent of the attendees at the conference plan to build a hotel in 2017 and 2018.  Five most important metrics in buying a hotel:

  1. Yield including any potential upside
  2. Are the demand generators diverse
  3. Quality of the brand
  4. High barriers to entry
  5. Strong RevPar Market

Cap rates range from 8.0 to 9.0 they are 50 to 75 basis higher than last year.  All in cap rate including PIP for full service 7.8% for limited service 8.5%.  Marriott requires a PIP every 7 years, Hilton requires a PIP upon a sale.  Construction costs are up 7 to 8% over last year.  Every good market is getting a lot of multifamily construction, causing prices to go up.  There is a lot of brain damage in building a hotel.

OTA’s & Airbnb are here to stay.  OTA’s have been around for 20 years.  They had 18% growth last year.  2016 Hotel Supply change 3%, 2016 Airbnb supply increase 117%.  Last year was the highest occupancy rate since 1984.  2017 new supply will outpace demand.

New Hotel Development

Construction lending primarily comes from local and regional banks.  Construction costs for a stick built hotel have increased from $90.00/s.f. to $140.00/s.f. since the end of the great recession.  Land cost should be around 15 to 20% of the total development cost.  Mixed use developments with restaurants, retail and office within walking distance are ideal places to build hotels.  As you can see from the experts the foreseeable future looks very good for the hotel industry

We have several “all Cash Buyers” who are eager to purchase.


2017 Multifamily Outlook

Sales volume for 2016 set another record year and per unit sales prices were once again rocketing up in the fourth quarter after holding fairly steady most of the year.  In 2017 sales volume is expected to dip below the record high levels of 2016 and price growth will slow down.  The forces that have produced the best multifamily market in recent memory largely remain in place.  The multifamily market continues to outperform other property sectors and has the lowest vacancy rate of all the major types at 5.2%.  Average rental rates experienced a 3.9% increase from 2015.  Aggressive pricing aside, the sector’s record of steady rent growth and high occupancy with low volatility continue to make multifamily an ideal defensive asset as the economic cycle extends into a seventh year.

Although the national vacancy rate for apartments is projected to increase to 5.6% in 2017 and to 5.7% in 2018, even at the expected peak that is still below the 15-year average vacancy rate of 6.1%.  Meanwhile, rental rate growth is expected to moderate over the next two years to 2.3% in 2017 and 2.2% in 2018, but still above the 15-year average growth rate of 1.9%.  On the supply side, tightening conditions for construction lending, plus significantly rising construction costs are likely to slow the pace of new deliveries.  This will help mitigate the risk of over-building and keep inventory levels tight in all but a few markets.

Multifamily continues to be the “Darling” investment for Buyers and Lenders, as it continues to outperform all other sectors.  We have more Buyers than Sellers including three different 1031 Buyers whose needs range from $5,000,000 to $15,000,000.  As you know these are the best buyers.  They are willing to pay top dollar.  They are highly motivated, and most important they will close.


2017 Hotel Outlook

Overall inflation will pick up to a 2.5% rate as compared to 2% in 2016.  This is largely due to rising gas prices.  The core rate, which excludes food and energy, will edge up 2.3% just a tenth of a point higher.  Look for interest rates to climb in 2017, with the Federal Reserve poised to hike them twice, and possibly three times, spaced through the year.  The federal funds rate will reach 1.1% by year-end and the bank prime rate 4.25% from the current 3.75%.  The 30 year fixed rate mortgage will go to 4.6% by the end of next year from the 4.2% rate now.

Housing is expected to downshift in 2017 as the post-election economy sets in, driven by a deceleration in home price growth, according to realtor.com®’s recently released 2017 housing forecast.  The forecast projects home prices growing at a rate of 3.9%, down from 2016’s 4.9% estimate.  Multiple factors are coming together, the foreclosure years are finally well behind us, we are now in record price territory in many places in the country, and higher mortgage rates which means Buyers cannot afford to buy as much house.

Many economists have a mild recession built into their models within the next 18 to 24 months regardless of who is at the helm.  The economic cycle kicks in no matter who is president.  The current economic expansion has lasted more than seven years, and the longest expansion period on record was 10 years.  That means the business cycle is pointing toward a downturn in the non-to-distant future.  Also a recession has always occurred within 12 to 36 months (an average of 24 months) after the unemployment rate falls below the natural rate of 5% – it was 4.9% in October.  So, it is likely a recession – albeit mild – will occur by the end of 2018.

The 2017 outlook for hotels is near record occupancy levels while average daily room rates (ADR) are expected to continue leveling off.  The annual occupancy rate for 2016 is expected to come in at 65.3% and the forecasted rate for 2017 is 65.0%.  Both of these marks are just shy of the 65.4% all-time record occupancy level posted in 2015.  The ADR change for 2014 was 4.6% while the change for 2015 was 4.5%.  The forecasted change for 2016 is expected to come in at 3.3% and remain the same for 2017.  The pace of ADR growth has been falling since 2014 and is expected to continue to weaken through 2019.

Prices continue to be at record highs.  Now is a great time to be a Seller.



The future continues to look very bright for apartment owners.

The future continues to look very bright for apartment owners.  Nationally apartment rents rose by 6% in 2015.  Year to date 2016 apartment rents have risen by 4%.  Still a very healthy number but not quite as frothy as 2015.  Many affluent households are choosing to rent versus home ownership.  The number of affluent renters has increased by 76%.  Approximately 90% of the growth in households now comes from renters.  Home ownership peaked in 2004 at 69.2%.  The current percentage is 62.9%.  There has been an increase of 10.9M renter households over this period of time.

We currently have approximately 800 apartment units in our market either under construction or in the final phase of planning.  Ninety two percent of the new units are rated as 4 & 5 star developments.  This is a result of declining home ownership.  New apartment developments are locating close to office centers in the suburbs and the Central Business District.  Sales volume in every major property type, light industrial, logistics, office and retail has declined over the last 12 months except for apartments which has increased by 10%.

Buyers are paying top dollar for any quality product in the 5 major property types.  Prices per unit for apartments continue to increase.  There has been an increase in price per unit of over 40% since the bottom of the market in 2009.  We have reached an all-time high.  In 2010 and 2011 it was flight to quality.  Now that most of the 4 and 5 Star properties have become so expensive the 3 star properties are seeing the greatest amount of transactions.

Our market continues to be very vibrant and exciting.