Joel Ross

Despite the pundits and brokerage advisors continuing to try to put lipstick on the pig, the reality is the hotel business is continuing to deteriorate. The data reporters continue to only want to discuss RevPAR, forecasting a resurgence of the economy and hotel performance for next year despite the deteriorating facts. Occupancy is negative for the year to date, and appears to be declining further as more new rooms open and as Airbnb grabs more market share in urban areas. When they report new rooms and claim it is not a big problem, they pointedly ignore Airbnb, as though it does not exist. Yet it is adding tens of thousands of additional rooms to inventory at a lower price to the consumer. Airbnb is now serving commercial customers, and 10% of its business is commercial. In urban areas it is more. Some Wall Street banks are even telling its traveling executives to use Airbnb where they can to save money. I suspect travel departments in corporations will do the same as it becomes more accepted.

The reality of the hotel industry is it completely crashed in 2009, and the data were terrible. Many hotels went to foreclosure or extensive loan modification, new builds stopped for several years, and PIPs were delayed for years. Now the demand has returned, but the industry ignores the fact that between population growth and increases in foreign tourism, there are over 30 million more potential guests. So while demand increased in actual numbers, as a percent of the potential market they have not. This is critical: it means that the demand is neither wider nor as robust as the industry data people purport. The problem as most people know is corporations are seeing declining profits, and travel is one of the first things to get cut. The higher dollar has crimped foreign visits, and now with Brexit and the major decline of the Euro, the disparity is even worse. It is also apparent that interest rates may remain very low for several more years, meaning retirees do not have the extra income they hoped to have for extra travel.

So we appear to have declining demand, slowing corporate demand, and an input of several hundred thousand new rooms hitting the markets all at once. This is coming just as the flood of maturing CMBS is starting to happen, meaning those hotels that are stretched already, will find it much harder to get a satisfactory refi just as business is slowing and values are declining. There will very likely be many new opportunities to buy distressed assets again next year. Just be sure you grind down the price and be aware of the PIP which may likely be required.