Muoio: Hotel valuations face an uphill battle since the growth in operating fundamentals is decelerating and interest rates are on the rise. One source of optimism is cap-rate spreads, a measure of risk premium, which are well above their historical average in the hospitality segment. A compression in cap-rate spreads to their historical norms would boost valuations.

GlobeSt.com: What can the hotel industry do to insulate itself from valuation drops in the future?

Muoio: Valuations' cyclicality will always exist, but the hospitality industry can do a few things to try to limit the downside. One key way is avoiding over-expansion and limiting supply increases, so that markets aren't flooded with supply overhangs when demand ebbs. Additionally, operators can try to constrain home-sharing start-ups such as Airbnb. Airbnb has created supply gluts, especially around peak demand events, eroding some of the upside for hotel operators. The recent legislation in New York is evidence of this strategy.

IRVINE, CA—Hotel valuations face an uphill battle since the growth in operating fundamentals is decelerating and interest rates are on the rise, but there is something that could help, Ten-X's chief economist Peter Muoio tells GlobeSt.com. As we recently reported, if you own a hotel in New York City, Miami, Washington, DC or San Francisco, now might be a good time to sell, according to the firm's latest Quarterly Hotel Monitor report, which reveals that we are seeing declining fundamentals in the sector in cities where tourism is a top industry—in most instances aggravated by an influx of new supply.

Last spring, we spoke with Bob Rauch, president of RAR Hospitality, and Atlas Hospitality's group president Alan Reay—both of whom participated in RAR's lodging forecast event in San Diego titled “Harnessing the Tailwinds: Capitalizing on the Successes of the Year Ahead”—about how hotels could gain an edge in 2016. Rauch said, “You don't want to throw away profits, so think of where you can cut labor costs. Minimum wage is going up, and so are insurance and energy costs, so you've got to figure out a way to reduce those. If you shop aggressively, you can cut costs. I'm doing this now in anticipation of next year because it's smart. there's no reason to pay the going rate, so to speak. Also, if you haven't renovated your hotel, now's your last chance. You won't have an excess of capital if we have a recession. Invest wisely in things that will make a difference for you.” And Reay added, “Over the last two to three years, we have seen tremendous appreciation in RevPAR and net income at California hotels; however, a number of owners have not kept pace with the increases and are now trailing the market. For successful hotel operators, there is a lot of opportunity and upside in purchasing these underperforming assets.” Stay tuned to GlobeSt.com for an upcoming interview with Rauch on another key aspect that can help hotels regain strength.

Recently, we spoke with Muoio about his expectations for hotel valuations and how the sector can insulate itself from valuation drops in the future.

GlobeSt.com: When can we expect valuations to rebound, and what factors might lead to that?

Muoio: Hotel valuations face an uphill battle since the growth in operating fundamentals is decelerating and interest rates are on the rise. One source of optimism is cap-rate spreads, a measure of risk premium, which are well above their historical average in the hospitality segment. A compression in cap-rate spreads to their historical norms would boost valuations.

GlobeSt.com: What can the hotel industry do to insulate itself from valuation drops in the future?

Muoio: Valuations' cyclicality will always exist, but the hospitality industry can do a few things to try to limit the downside. One key way is avoiding over-expansion and limiting supply increases, so that markets aren't flooded with supply overhangs when demand ebbs. Additionally, operators can try to constrain home-sharing start-ups such as Airbnb. Airbnb has created supply gluts, especially around peak demand events, eroding some of the upside for hotel operators. The recent legislation in New York is evidence of this strategy.