It looks like commercial real estate’s hospitality sector, like others in the industry, should benefit from a continued strong economy.
Occupancy rates could be the highest in years through 2018, even as new development should increase the overall market by two percent, according to a recent Marcus & Millichap hotel forecast report.
The main reasons for these and other favorable hospitality developments that the firm points to include: increased consumer spending and income, the projection that tax reform will improve businesses overall, the benefits of a low unemployment rate, and strong small business confidence.
All of this should equate to more business travel and vacationing, Marcus & Millichap says, which could lead to increased investor demand in the sector, along with the improving fundamentals. Occupancy rates are expected to rise 30 basis points, hitting 66.3 percent in 2018, and surpassing 2017’s 30-year high. Overall, RevPAR (revenue per available room) and ADR (average daily rate) are also expected to increase, but at slightly lower levels than the last couple years.
Broken down by metro area, Nashville experienced the highest RevPAR growth over the last five years, with a 50-percent increase, 15 percent higher than any other locale. The demand by visitors in the area has led to a boom in Nashville hotel construction as a result, with 5,000 rooms underway and another 5,000 expected to break ground in the next year.
It was followed by Atlanta, with a 35-percent RevPAR jump in the last five years. That is fueled by an increase in corporations expanding, such as Anthem and Mercedes Benz, as well as an uptick in tourism.
Meanwhile, from an investor standpoint, Marcus & Millichap contends that there is a strong focus on limited-service hotels, in the economy and upper-midscale sector. Private investors are the main buyers for these assets, pushing cap rates as low as seven percent if they are well located. REITs and institutional investors are mainly going after upscale and luxury.
Consumer trends include increased demand to experience independent hotels, and a push by millennials to try new brands by long-time chains such as Hyatt Centric, Marriott’s Moxy and Starwood’s Aloft.
Jeffery I. Cohen, Senior Vice President of Franchise Capital Advisors, a boutique Investment banking firm in the Hospitality and Franchise/Chain sector also sees the steady flow of foreign tourism to the US National Park System moving the needle for the industry in great numbers. “National Parks are often in tertiary markets and business has been robust for several years. Our clients generally can book their properties out twelve to sixteen months in advance by attending international tourism and group booking conferences. China, India and South America remain the largest demographic for large group bookings. Hotel owners and operators in these markets can control purchasing and plan labor more effectively, therefore increasing profitability and much higher net operating income than other markets of same brands.”
Based on all of this, if commercial real estate’s hospitality sector wasn’t on investors’ radar screens before, it might be time to take a closer look at these assets.
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