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Near‐Term Outlook for Lodging Remains Positive

Although the hotel industry has been operating at peak levels for several years, accelerated supply growth, which has been readily absorbed in most markets due to the expanding economy, has contributed to weaker than normal average room rate growth.

By Daniel H. Lesser | April 19, 2019 at 04:00 AM

While the longer economic growth endures, intuitively the risk of recession rises. Despite GDP indicative of a slowing economy during Q4 2019, the U.S. economic expansion which commenced in June 2009, is soon approaching the longest post‐World War II expansion with uninterrupted growth. Investors frequently ponder where we are in a cycle. Is the current economic climate most like 1995, 1999, 2000, 2003, 2008 or 2016? While history often rhymes, the reality is we are in 2019, which presents its own set of idiosyncratic risks and opportunities. Many economists have opined that expansions do not die of old age, rather they expire due to an unpredictable event(s) such as shocks to oil prices and/or the bursting of asset bubble(s).

As the US economy goes, so goes the nation’s lodging sector fundamentals. Although the hotel industry has been operating at peak levels for several years, accelerated supply growth, which has been readily absorbed in most markets due to the expanding economy, has contributed to weaker than normal average room rate growth. Furthermore, despite shortages of and escalating costs of labor, on average nationally hotel owners and managers have sufficiently controlled other operating costs to achieve the highest levels of gross operating profit margins in more than fifty years. With this said, due in part to rising minimum wage rates, profit margins of numerous assets situated in major U.S. markets have contracted.

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