Hotel party can’t last forever, experts note

Fears associated with a maturing cycle, overbuilding and global instability are leading some experts to ask just when hotels will stumble following years of record growth.

Fears associated with a maturing cycle, overbuilding and global instability are leading some experts to ask just when hotels will stumble following years of record growth. 

“Hotels are the quickest to return when a market comes back, but they are the first to suffer during a downturn,” Mary McNeil, a managing director with Fitch Ratings, told Real Estate Capital.

Fitch Ratings posted its latest hotel outlook, noting that the sector is “peaking” — the only major asset class assigned that distinction. 

images (1)Markets to watch include New York, Miami, Nashville, Seattle, Houston, and Dallas “due to potential oversupply,” Fitch stated. 

“The construction pipeline within these markets exceeds 15 percent of the existing supply of available rooms, which may put additional pressure on RevPAR (revenue per available room) sustainability.”

Kroll Bond Ratings Agency (KBRA) issued its own report calling further attention to the fact that the hotel party can’t last forever.

US lodging fundamentals have posted strong growth each year since 2009, resulting in record levels of demand, occupancy, average daily rate (ADR), RevPAR and hotel profitability in 2015, the report notes.

But the lodging industry’s strong performance is primarily due to limited new supply additions and record demand levels, and construction has ramped up.

There were 469,000 rooms in the pipeline at the end of 2015, a 13.6% increase over the prior year and the highest level since 2009; and room starts in 2016 are expected to exceed peak levels in previous real estate cycles, according to KBRA.

In addition, “demand growth is tapering off as both local and global political and financial volatility has become more apparent in the latter half of 2015 and into 2016.”

Credit metrics also weakened in 2015 as competition among lenders heated up: “KBRA observed loans structured with inadequate reserves… [and] it has also become more prevalent to securitize hotels with very limited operating history.”

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