Let Data, not Emotion, Guide Your Hotel Investment Strategy

Our national past-the-peak economic environment isn’t slowing down lodging investment. Not according to Peter Nichols, vice president and national director of Marcus & Millichap’s Hospitality Group. Buoyed by still-strong economic underpinnings, the sector is on track for a hopping 2019.

“The employment numbers are encouraging,” he tells GlobeSt.com, “and the Fed is moderating its stance on increasing interest rates.” Adding to that, the push from the revised tax structure “has not only lowered the standard tax rate, but has also accelerated depreciation. It’s a climate made for hiring, which bodes well for corporate travel.” But personal travel, especially among Millennials and Gen-Xers, also promises to be at least on par with 2018. “That’s encouraging for performance.”

Also riding in on the tax reform bill was the creation of some 8,700 Opportunity Zones spread throughout the 50 states. It’s an opportunity indeed, says Nichols, for investors and developers to get in on the ground floor of up-and-coming neighborhoods and a ready-made positive for investors that already have assets in them.

“Of course,” says Nichols, “it doesn’t apply to everyone in the hospitality space, but if the property is in an Opportunity Zone, owners can either increase or build new hotels there and take advantage of very attractive tax rates based on the length of hold.”

Marcus & Millichap’s 2019 North American Investment Forecast for the sector reflects the positive trends: “Another year of steady job creation and rising wages will support consumer spending at hotels this year. The improving economy is boosting travel plans, which underpins room demand. At the same time, the supply of hotels is beginning to moderate.”

The much-touted impact of home-sharing services such as Airbnb and HomeAway is still evident, and the report tracks moves on the part of more traditional lodging concerns to compete, by creating more of a personal experience, such as cooking classes and area tours. But, the threat which loomed so large not too long ago, has diminished in the face of increasing local regulation.

“Airbnb was a real big buzz in 2017 and 2018,” says Nichols. “Now we’re seeing a much more thoughtful local-government approach to that model. They realized they were losing neighborhood dynamics as corporations bought up neighborhoods and turned them into rental properties. They’re limiting the types of properties that can go online and fining companies for violating such regulations.”

Looking at the market by the numbers, the report reveals that, “Healthy economic growth will support room demand in 2019, keeping the occupancy rate at elevated levels. The rate is forecast to climb 30 basis points this year to 66.5 percent, a more than 30-year record high. Elevated occupancy will also support healthy increases in the average daily rate and RevPAR this year, albeit at a moderated pace of growth compared to the prior five-year average.”

Disciplined construction helps keep occupancies tight, and “supply is expected to increase 1.8 percent in 2019, down from the two percent increase recorded last year,” the report states.

Of course, as Nichols points out, lodging, like most commercial real estate, is a “street-corner business,” and performance is highly localized. For instance, he points to “Nashville, where performance is flattening out a bit, even though its performance strength has been leading U.S. markets over the past few years.”

Which is why market-knowledge is key for investors. “The trick is to identify what and where your strengths are,” he says. “For instance, you have to ask yourself if now is the time to stretch and get into that larger, more complicated full-service asset when your only experience has been limited service. If you get caught up in the emotion of what you want to do, and you stretch your capabilities and knowledge, that’s where danger comes in.”

“Being disciplined is an investor’s biggest advantage,” he continues. “When you acquire a property, you have to do so with a plan to exit that property and then execute on that plan.”

With that caveat as your guide, he concludes, “There’s a tremendous amount of opportunity in the marketplace.”