Daniel Lesser

NEW YORK CITY—The US hotel industry continues to be a good news/bad news story. The lodging sector has experienced RevPAR growth for 79 consecutive months, and by the end of this year is anticipated to achieve the longest ever recorded streak of positive performance. For the month of August, a record 110 million hotel room nights were sold, and ADR and RevPAR remain at all-time highs. However, the general consensus amongst market participants is that with demand growth decelerating and supply growth increasing, the national occupancy rate has peaked and the industry's pricing power is waning.

A weakening in US RevPAR is anticipated in the not too distant future, as already evidenced by declining levels in select major markets including: New York, Miami, and Houston. Luxury, Upper Upscale, Upscale, and Upper Midscale hotels continue to achieve strong occupancy levels, while Midscale and Economy properties operate below national averages. Group demand growth has decelerated and for the last few quarters has only increased minimally. As the corporate and contract rate negotiation season is now in full swing, the 2017 outlook is for a change in the balance of power from sellers to buyers. US hotels' booking and marketing expenses are rapidly outpacing total revenue growth, while recent direct-booking efforts among the largest US hotel companies in order to counteract this appear to be doing little to slow down the ever-present and growing OTAs.

The LW Hospitality Advisors (LWHA) Q3 2016 Major US Hotel Sales Survey includes 44 single asset sale transactions over $10 million, none of which are part of a portfolio. These transactions totaled roughly $2.7 billion, and included approximately 11,400 hotel rooms with an average sale price per room of $240,000. By comparison, the LWHA Q3 2015 Major US Hotel Sales Survey identified 49 transactions totaling roughly $2.1 billion including 10,300 hotel rooms with an average sale price per room of nearly $204,000. Comparing Q3 2016 with Q3 2015, the number of trades has decreased by 10 percent while total volume has increased by 29 percent, and the average sales price per room has risen by 18 percent. The pace of transactional activity for the remainder of 2016 is expected to remain static.

Q3 2016 LWHA Hotel Sales Report

A significant amount of legacy CMBS debt will mature by the end of 2017. Concurrently, lenders who underwrite loans to be sold to securitization conduits are grappling with new regulatory requirements effective December 24^th to include “skin in the game” by retaining a 5 percent slice of each CMBS deal for five years. Additionally, underwriting has tightened again as rating agencies are looking to 2015 cash flow as peak, and in some cases at the average of years 2013 through 2015.

The US economy continues to chug along in a slow and steady manner with little empirical evidence of recession in the foreseeable future. Gasoline prices remain relatively low and although declining, growth in US travel endures. Inbound overseas capital seeking stable shelter and chasing yield, particularly from Asia and the Middle East, are seeking hotel opportunities in primary and secondary US markets. Recently, S&P Dow Jones Indices and MSCI Inc. moved stock exchange listed Equity REITs and other listed real estate companies from the Financials Sector into a new 11th headline Real Estate Sector within the Global Industry Classification Standard (GICS). This move marks a major step in the growth and recognition of REIT based real estate investment, which obviously includes hotels, as a fundamental part of portfolio allocation.

The US hotel industry faces many challenges. Of recent note is the US Department of Labor's announced overtime rule which, effective December 1^st will broaden the number of workers eligible for overtime pay by raising the salary threshold for exempt workers to $47,476 from $23,660 per year. Brexit has added to the US dollar's strength creating negative pressure on inbound foreign travel to the United States. Finally, with the US presidential election looming, uncertainty exists relative to immigration and tax reform. The outlook for the lodging sector can be summed up as cautiously optimistic within a wait and see environment.