According to research by Marcus & Millichap, the accelerating U.S. economy, supported by strong employment growth and rising confidence levels, bodes well for continued hotel property performance. Consumer confidence and business confidence remain at record levels, reinforcing expectations of healthy consumption and business spending this year. Elevated confidence levels will likely buoy room demand through the remainder of the year, keeping occupancy at a record high and supporting growth in revenue per available room (RevPAR).
Here are a few of the takeaways from the midyear report:
- Healthy U.S. economic momentum and elevated consumer confidence levels have boosted travel expectations for 2018. Summer travel, in particular, is expected to rise 6 percent from last year and the majority of these trips will be to domestic destinations. Rising travel should reinforce hotel occupancy, which remains at a more than 30-year record high.
- Travelers are increasingly seeking hotels in suburban areas and smaller metro areas and towns. Occupancy in both locations has picked up considerably in the past 12 months after holding relatively steady in the prior year. Many local tourism offices are working vigilantly to lure tourists to these destinations.
- Older millennials, particularly in their mid- to late 30s, are increasingly planning family vacations, with 44 percent anticipating to take one this year. This surpasses the percentage of baby boomers and generation Xers who plan to do the same. Most of these trips will be road trips, potentially supporting demand for interstate hotels.
- New York City and Dallas lead construction. Nearly 119,000 rooms were completed nationwide during the year ending in the second quarter across more than 1,000 hotels. More than 186,800 rooms are underway and an additional 221,900 rooms are expected to break ground within the next 12 months.
- Rising room demand in many of the nation’s smaller markets continues to drive buyer interest in these areas. Properties in the Southwest and Carolinas regions were increasingly targeted during the past four quarters, with transactions rising 51 percent and 23 percent, respectively. In the Southwest, demand picked up considerably throughout Arizona and New Mexico during the past 12 months.
- Higher average first-year returns continue to lure investors to the hotel market. Properties on average trade with capitalization rates in the mid–8 percent band but can vary by as much as 200 basis points depending on location and flag.