This article is republished with permission from REITCafe.
Memorial Day unofficially kicks off the busy summer travel season, and this summer is shaping up to be the busiest travel season in years. AAA expects 700,000 more people to hit the road this weekend than did for Memorial Day 2015, the greatest number of travelers since 2005. Low gas prices, and lower, or stable, airfare and rental car costs are incentivizing people to travel. At the same time, some U.S. travelers are wary of international travel for a variety of reasons, contributing to a boom in domestic travel. Already-bad Transportation Security Administration (TSA) wait times are expected to only get worse as summer travel picks up.
Despite the bright outlook for summer travel, almost five months into the year, year-to-date lodging sector real estate investment trust (REIT) returns measured –2.93 percent. REIT stock values have pulled back as investors discount near-term performance in favor of longer-term uncertainty, prompting companies like Host Hotels to implement stock buybacks.
| TREPP-i Survey Loan Spreads (50–59% LTV)* |
| This Week | Previous Week | Previous Month | End 2015 | End 2014 | |
| Industrial | 163 | 166 | 171 | 163 | 138.5 |
| Multifamily | 162 | 166 | 169 | 168 | 139.8 |
| Office | 172 | 179 | 178 | 168 | 148 |
| Retail | 162 | 165 | 171 | 168 | 139.8 |
| Average Spread | 164.75 | 169 | 172.25 | 166.75 | 141.5 |
| 10-year Treasury Yield** | 1.85 | 1.87 | 1.72 | 2.27 | 2.17 |
First-quarter hotel performance metrics were weak, but they improved during April. Between April 2015 and 2016, occupancy gained 2.2 percent to 68.1 percent, and average daily rate (ADR) increased by 2.8 percent, for 5 percent growth in revenue per available room (RevPAR), according to STR. RevPAR growth was the best since last fall, raising the question of whether the market is turning around. However, one month does not denote a trend, and results during the first three weeks of May have been mixed. RevPAR gained 0.4 percent during the week ending May 7, fell 2.7 percent during next week, and climbed 2.7 percent during the week ending May 21.
The sector still faces headwinds from the strong U.S. dollar that has hampered international travel to the United States, however.
A robust pipeline of new hotel room deliveries is raising concerns about overbuilding. STR’s March 2016 Pipeline Report included 153,345 rooms in 1,201 projects under construction, an increase of 21.5 percent from year-ago levels. Almost half of the new construction is occurring in the 26 largest markets (by existing supply), including New York, Houston, Los Angeles/Long Beach, Dallas, and Miami.
The jury is out on how much of a competitor Airbnb is to the hotel sector. Airbnb’s U.S. listings totaled 550,000 in 2015, according to Airdna, a data and analytics provider. Not all the listings are available at any one time, though. Many Airbnb listings do not offer housekeeping and other services and are not conducive to short-term stays. Some feel that, with its lower price point, Airbnb attracts people who would travel less often or not at all, thus increasing the overall size of the traveling community. However, Airbnb is beginning to offer more hotel-like services, which could make it more competitive with hotels.
Hotel earnings have stayed healthy, and the largest REITs, including Host Hotels, Hospitality Properties Trust, and Apple Hospitality REIT, experienced strong revenue growth and beat earnings estimates for the first quarter.
Property fundamentals and valuations are currently strong, but the real estate cycle is maturing. Demand growth is healthy, but the influx of new supply and competition from online accommodation sharing marketplaces like Airbnb make the future less certain.
* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.
** - 10 yr. Treasury Yield as of 5/27/2016.
