Hotel Metrics Healthy, But Cap Rates Creep Up

Michael Tucker mtucker@mba.org

April 12, 2018


U.S. hotels continue to see growth across all travel segments, but hotel capitalization rates have started to increase, analysts said.

TravelClick, New York, reported average daily room rates rose 0.7 percent during the first quarter as bookings increased 1.7 percent. This marks an ongoing positive trend from the beginning of the year, TravelClick Senior Industry Analyst John Hach noted. "With the spring travel season kicking off, the improved month-over-month performance across business and leisure transient bookings is very encouraging news for hoteliers," he said. "Additionally, as we head into the second quarter of 2018, the data show that both rates and occupancy are continuing to hold steady for now."

But US Realty Consultants, Columbus, Ohio, said U.S. hotel capitalization rates have "ticked up." The firm's Hotel Investor Survey found early signs of modest cap rate weakening, "although overall yield expectations continue to show strong investor interest, particularly in the full-service sector."

Discount rates--an investor's required rate of return--have held largely flat for full-service hotels, increasing just 10 basis points since the last survey in summer 2017, but limited-service hotels saw 50 basis point discount rate increases, USRC said. At the same time full-service and limited-service hotel capitalization rates increased by 30 basis points and 40 basis points, respectively.

For both full-service and limited-service hotels, overall ADR growth expectations are now slightly below the generally accepted 3.0 percent "stabilized" rate, USRC said. This is consistent with last summer's survey, which was the first time anticipated growth fell below this threshold since financial crisis. Expense growth expectations now nearly equal the longer-term 3 percent stabilized levels. "Together, these assumptions contribute to wider anticipation of slower net operating income growth for the sector," the report said.

Hotel stock prices have slipped. Publicly traded hotel stocks fell 1.1 percent in March and 2.1 percent in the first quarter, the STR/Baird Hotel Stock Index said.
"After eight years of growth, industry stakeholders are rightly wondering how long the upcycle can last, but we expect growth for the foreseeable future, albeit at a slower pace," STR president and CEO Amanda Hite said.

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