by Joel Ross
Hotel values have been in decline, along with occupancy, while cap rates and supply rise; and it’s not all Donald Trump’s fault.
Apparently at the Americas Lodging and Investment Summit and Hunter Hotel Investment Conference, once again, the story was the industry is fine, although slower.
Everyone only wants to talk revenue per available room, not net operating income, and any decline in occupancy is now all President Donald Trump’s fault. The American Hotel & Lodging Association touts its futile efforts to try to stop Airbnb, yet three of its young founders are on the Forbes billionaire list at $3.8 billion each and Bill Marriot is nowhere to be found, nor is anyone named Hilton or Wilson. Do you think there is a message here?
The reality is values have continued to decline since the Phoenix Lodging Conference of 2015. In fact, they are down 11% since that conference—down 4.7% year over year and another 1% last month. Meanwhile, Airbnb is thriving, and is worth more than any other regular hotel company. If Airbnb is really not impacting hotel results, why is AH&LA making such a major, costly and so far mostly ineffective effort to try to stop them?
Occupancy has been in steady decline for more than a year and continues down. Cap rates are rising, and supply is ramping up along with interest rates. As soon as the Dodd-Frank Act is modified, there will be even more construction lending for hotels. Sam Zell just stated that hotels are probably the most in danger of oversupply.
In some markets, values are now still below 2007 on an inflation-adjusted basis. Labor costs continue to rise as average-daily-rate increases trail off and continue to be below the pundits’ forecasts, and that labor cost trend is likely to continue over the next two to three years as the economy continues to improve and unemployment declines. Property taxes continue to rise too fast, and that is highly likely to continue as pension costs for union government workers and teachers eat local municipal budgets. Now we have the failure caused by the far-right-wingers to reform health care, so those costs will continue to rise for hotels.
And now we have the travel industry making silly excuses that Trump is hurting the industry by barring travel from terror locations, and forecasts that foreign travelers will decline by 4% versus the good growth during Obama years, all because of Trump’s visa rules. They forecast the next decade will suffer because of Trump.
Well, during the Obama years, the whole world and every industry was recovering from the financial crash, some better than others, so since 2009, of course there was a good increase in foreign travelers. To suggest that Trump’s orders are a bad thing and need to stop is nonsense.
Maybe it is the continuing high value of the dollar against the euro, yen, yuan and pound over the last year, or maybe the serious economic problems and capital controls in China that have created a cutback in foreign travel. Or maybe it is because U.S. hotels are now too pricey for many foreign tourists since ADR is up so much along with the dollar. Combine all of that with the continued slow economy in Europe, and what did you think was going to happen?
Trump is barring travel from six war-torn, dysfunctional, very small countries that have almost no functioning governments or economies. How many tourists were you expecting from Yemen or Somalia, or maybe rebel fighters from Libya, this year? All the blame on Trump sounds more like a political statement than a data supportable forecast. Making analogies to 9/11 is a material misunderstanding of the major differences in the world economy, the dollar, the economy of Europe and China, and other factors over the past 16 years.
If tax reform does not pass by September, along with a real infrastructure program, you can write off the next two years, at least as growth years. It will be a real bad shot to the economy and hotels if the Freedom Caucus again acts like 3-year-olds and stupidly stops tax reform. That would be a real black swan event.
If Marine Le Pen does get elected president in France, as now seems possible, the euro will collapse further and you will see a real drop in European tourists. Add Brexit now being triggered, and the disruption to the euro and the European economy will be dramatic.
China is pumping up the economy temporarily because there is a major party congress this year to select leaders for the next five years, and to essentially make President Xi Jinping a real dictator. Once that election is completed, the Chinese economy is likely to slow again as they try to reduce leverage in the economy and to shut down state-owned zombie companies. Capital controls may be tightened even further. As trade talks with the U.S. get underway, there may be retaliation by China. If the U.S., Korea and Japan are forced to take military action to stop North Korea, you can forget about Chinese tourists. There are big black swans all over Asia at the moment which have the potential to negatively impact Chinese tourism to the U.S. The Japanese economy continues to struggle, and wages there remain a problem.
So what to do? The focus needs to get off RevPAR and on to costs and cash flow. Learn to live with Airbnb. It has far less risk than the proliferation of hotel brands and the intrusion into your franchise impact area. With supply growing faster than demand, occupancy declining, and the huge uncertainties in Congress and the EU and Asia, the revenue side is not going to improve much, so it is all about operating cost. If you are a buyer, it is, as always, in the buy price, not the sell price when you exit. Walk away if you cannot get the buy price you feel you need to protect against these risks.
Values will continue to decline, labor and operating costs will continue to rise, net operating income will continue to decline, and we are at real risk if tax reform is not passed. Technology changes and requirements are getting very costly to upgrade, and the changes are coming quickly. You need to be finding ways to reduce staffing but give even better service.
Pick your spots for development in secondary cities, where there will be increased spend due to the major increase in defense spending, infrastructure spending or technology company growth.
Don’t bank on Chinese tourists or Europeans being a big part of your occupancy. Prepare strong marketing plans for summer. Americans will still travel, and it is up to you to grab more than your fair share.
If you are a seller, get realistic. Nobody is going to pay up for your hotel anymore. You should have sold in 2015, and now you need to understand you blew it, and missed the market. Get real about what your hotel is not worth, ignore the appraised value, or continue to be an owner and work on cutting labor and upgrading your property so it competes well.
This article was first published by Hotel News Now and is reprinted with permission of the author.
