Thayer Lodging President Sees Hospitality Slowdown, Says Worst Is Yet To Come

Nationwide hospitality revenue has begun to slow down midway through the third quarter, and one top hotel executive expects it will get even worse. 

For the 28-day period ending Aug. 12, nationwide hotel RevPAR, or revenue per available room, grew at a rate of 0.9% over the same period in 2016, according to data from hospitality research firm STR. This comes after Q2 and Q1 experienced year-over-year growth rates of 2.7% and 3.5%, respectively. The noticeable drop in RevPAR growth so far in Q3 signals a worsening performance that has begun to catch the attention of hotel executives. 

“You can see we’re slowing down sequentially as the year rolls through,” Thayer Lodging Group President Bruce Wiles said. “It’s beginning to get into a period of time where it is evident that the industry itself is slowing down.”  

The slowdown is even more stark when looking at previous years. Nationwide RevPAR finished 2016 at 3.2% over the previous year, after the market performed much better in 2015 and 2014 with growth rates of 6.1% and 8.2%, respectively. 

The slowdown can be largely attributed to the nationwide surge in hotel deliveries, Wiles said. As president and chief operating officer of Thayer, Brookfield Property Group's hotel investment and management platform, Wiles oversees a global portfolio of hotels and serves as chairman of Hospitality Investors Trust, a private REIT that owns 145 hotels with a value of $2.5B. 

“A lot of the hotels being developed are midrange assets that can be stick built in 14 to 18 months,” Wiles said. “You certainly have a development industry that has gotten more responsive and can put in place products more quickly.”

Through July, nationwide supply has grown 1.8% year over year, according to STR, and that number is projected to reach 2% by December. That is a significant increase from recent history, with year-end growth rates of 1.5% in 2016, 1% in 2015 and 0.6% in 2014. The growing supply boom is expected to continue in 2018, with a projected growth rate of 2.1%. 

This continued supply growth will make 2018 a challenging year for some in the hospitality industry, Wiles said. 

“It will be a tougher operating environment,” Wiles said. “It will depend on what you own and how well-located it is, but things are going to slow down. We’re not that heavily leveraged, so I don’t stay up at night worrying. If I had a lot of stuff under construction, I would worry.” 

While demand has largely kept up with the oncoming supply and preserved strong occupancy levels, Wiles sees some key demand drivers slowing down. 

“Everybody is talking about a falloff in the amount of demand from a corporate standpoint, both transient and group,” Wiles said. “I don’t know if it's a change in behavior, with more remote capabilities, or if travel has just gotten too expensive. Maybe people are rethinking it.” 

Despite the slowdown in business travel, Wiles said leisure travel and international tourism have remained bright spots and have kept the industry afloat. 

“Consumers are feeling better about their lives and are taking a lot of extended weekends,” Wiles said. “If you’re in markets that have both commercial midweek demand as well as weekend demand, you’re doing great.”  

Some of the best performing markets, Wiles said, have been leisure-oriented cities like Orlando and San Diego. He said cities with large oil industries like Houston have struggled. The smartest bets from an investment standpoint, Wiles said, are still large coastal cities with major national industries, like technology and medicine.

He said Boston has had a surprisingly disappointing year, which he attributes to a slow convention calendar. He said the hotel supply boom has been heavily concentrated in New York City and the industry has felt the impact. 

“New York has been a tough market this year, but when you think about the number of guest rooms they’ve taken on, about 25,000 rooms over 24 months, you’ve seen an explosion of guest rooms,” Wiles said. “When you think about the fact that they’re only modestly off, that says something about the desirability of the destination.”  

The D.C. market, Wiles said, has had a strong year bolstered by a busy convention schedule and visitors from inauguration and other large demonstrations. But the District is preparing to take on a lot of supply, highlighted by nearly 700 rooms opening this fall at The Wharf, and Wiles expects the city's hospitality performance will be down next year. 

“Next year, you’re not going to have the inauguration, so it will certainly be a tougher year,” Wiles said. “You’re going to have more properties delivered in the suburbs and downtown, so it will be tougher.”  

Wiles will discuss his outlook for the hospitality industry at the sixth annual Bisnow Lodging Investment Summit at the Ronald Reagan Building and International Trade Center on Sept. 19.