U.S. hotel values remained relatively stable in 2018, as RevPAR growth of 2.9% was largely offset by increasing expenses and capitalization rates remained flat. Nationally, hotel supply growth accelerated from approximately 1.5% in 2016 and 2017 to 2.0% in 2018. However, demand continued to outpace supply, providing a foundation for another year of record occupancy, ADR, and RevPAR levels. Demand growth was supported in part by the strong economic growth temporarily induced by the Tax Cut and Jobs Act, which drove up the stock market and put more discretionary income into the hands of both corporations and consumers. From an economic standpoint, the temporary positive effects of the tax cuts dissipated in the final quarter of the year, and businesses and investors grew cautious over slowing growth and the potential for further interest-rate hikes; the late-2018 market retrenchment was compounded by a partial government shutdown that began in December and continued well into January 2019. Early in 2019, the Federal Reserve indicated a pause on potential rate hikes, and markets responded positively, recouping the losses from late 2018 by the end of February. The sharp market decent and rebound was over and done with so quickly that there was no discernable effect on national hotel demand during that period, even with the government shutdown. While this may be an indication of the relative strength and resilience of the prolonged RevPAR growth trend, the underlying economic volatility and uncertainty has also sounded a note of caution going forward. As such, hotel demand growth is anticipated to slow to a pace below 2.0% in 2019, with a consensus of forecasts expecting occupancy to remain flat or slip slightly for the year. ADR growth is projected to remain relatively stable at or slightly above inflationary levels, resulting in RevPAR growth expectations of 2.3 to 2.5%. Beyond 2019, a further deceleration of demand growth is anticipated, due in part to increasing recessionary concerns.

In 2018, national RevPAR growth reached 2.9% while the change in the Consumer Price Index (CPI) registered only 1.9%. On the surface, this would generally indicate minimal growth in overall hotel profitability. However, the CPI is only a crude proxy for the actual expense structure of hotel operations. The most significant individual expense at any hotel is labor, which is only indirectly measured by the CPI. According to the Bureau of Labor Statistics, the rate of average weekly earnings growth, on an annual basis, grew steadily throughout 2018, particularly in the latter half of the year. This partially reflects the new minimum-wage laws taking effect across the country, mandating wage increases well above inflation. It also aligns with anecdotal evidence from hotel operators across the country reporting labor shortages and difficulty finding and retaining quality employees. From a national industry-wide perspective, rising labor costs combined with slowing RevPAR growth are expected to keep NOI levels relatively stable in the near term, although various factors at individual hotels will undoubtedly result in fluctuations at the property level.

Nationally, 2018 proved to be a strong year for the hotel transaction market, with the number of major transactions, average price per room, and total dollar volume increasing measurably from 2017 and approaching the peaks reached in 2015. The lodging sector attracted greater interest from investors looking for higher returns, and existing owners availed themselves of improved market conditions to strategically fine-tune their portfolios. After rising somewhat in 2017, capitalization rates contracted modestly in 2018, a reflection of the healthy outlook for hotel performance, a competitive lending environment, and downward pressure on equity yield expectations. Going forward, the Federal Reserve's wait-and-see approach to rate increases should allow for a continuingly competitive debt market at relatively low and stable rates. Meanwhile, the diminished expectations of NOI growth have halted the downward trend in equity rates of return. As such, cap rates are anticipated to hold steady in the near term. In the first quarter of 2019, the transaction market showed signs of cooling, as investors reacted to the market volatility of late 2018 and early 2019. Our Spring 2019 HVS Broker Survey reported a relatively stable market on a national level, with a somewhat more cautious outlook than the sentiment expressed in our Fall 2019 HVS Broker Survey.

The same Spring 2019 HVS Broker Survey reflected a variance in market sentiment by region and market, with 21% of respondents reporting local market conditions as "hot," and only 9% as "cool," with the rest reporting stable. These regional broker perspectives help add context to the RevPAR, expense inflation, transaction, and investment trends discussed above. The value of each hotel property is influenced most directly by the local market conditions and the competitive circumstances of the specific property. In our review of 38 major markets across the country, ten experienced moderate value increases in 2018, while five experienced moderate value decline; the remainder were stable. Looking forward, for those same markets, we anticipate that approximately half will follow the same stable value trend anticipated for the nation as a whole, while the other half will experience an increase or decrease in value. In many markets, the local outlook for supply growth and absorption will be the determining factor in value trends, whereas other areas will be affected by changes at major demand generators or by local labor market conditions. Our market experts have completed their own forecasts for each of the 38 major markets, reflecting the convergence of the national trends discussed here with local market dynamics.

* Although the HVI cannot tell you what a particular hotel is worth, it does provide excellent “big picture” data, indicating which market areas are experiencing positive trends, and thus may present good investment opportunities. The HVI for the U.S. is a measure of the strength of the lodging industry as a whole and, specifically, the hospitality investment market. The HVI for the various identified markets can provide a basis to evaluate and compare different geographic regions. For more insight on the limitations and applicability of the HVI, please read the message on the HVI home page by clicking on the graphic at the top of this page.

Change In Value For Market:

Legend
Significant Value Increase: Greater than +10%
Moderate Value Increase: Between +3% and +10%
Stable Values: Between -3% and +3%
Moderate Value Decline: Between -3% and -10%
Significant Value Decline: Less than -10%

For more information, please contact:

Daniel McCoy, MAI
[email protected]
  • +1 970 215-0620 (w)
Suzanne Mellen, MAI, CRE, FRICS, ISHC
[email protected]
  • +1 415 268-0351 (w)
  • +1 415 896-0868 (w)