U.S. Lodging Cycle Concierge Gaming, Lodging & Leisure
February 2017
Fitch Ratings expects U.S. lodging RevPAR growth to decelerate to 1%–2% during 2017 as the industry enters the seventh year of this upcycle. Cumulative RevPAR growth during this recovery of 53% has exceeded the recoveries that began in the early 2000s (38%) and early 1990s upcycles (50%). Real RevPAR is 8% above its prior cycle peak, aided by mid-60% occupancy rates that are the strongest on record. Fitch continues to expect 2018 RevPAR to turn slightly negative. However, there is upside risk if U.S. economic growth reaccelerates under the new administration. Forward demand barometers are generally positive and have strengthened during the last three to six months. The index of leading economic indicators remains solidly positive. Lodging REIT shares have staged a strong recovery and are trading well ahead of their trailing 12-month (TTM) average. The latest New York Federal Reserve U.S. recession probability model readings are well below levels that have foreshadowed RevPAR downturns. Slightly positive TTM lodging industry occupancy growth is arguably the weakest indicator; however, it has shown some signs of stabilization. Market optimism, evidenced by the strong equity market rally (S&P 500 +10%) since the eve of the U.S. presidential election, has presaged positive economic forecast revisions. The 49 respondents to the Philadelphia Fed’s First Quarter 2017 Survey of Professional Forecasters increased their 10-year U.S. GDP growth expectations to 2.45% from 2.28% a year earlier. The survey puts monthly U.S. payroll employment gains at 180,300 compared with the prior 173,600 estimate. Higher inflation and interest rate expectations balance the positive growth expectations. RevPAR growth during 2017 will be on the back of average daily rate growth, rather than occupancy. Fitch expects RevPAR growth to remain strongest in the suburban and airport location segments, aided by little new supply due to their unloved status with many investors. Hotels in these segments are generally lower priced, which should keep limited service hotel RevPAR growth ahead of upscale properties. RevPAR comps against 2016 are easier in the first quarter of this year, but become more challenging in the higher-demand periods of April through October. Fitch expects supply growth to accelerate during 2017 to approximately 2%. Hotel rooms in the high visibility, under construction and in final planning stages of the pipeline are 23% above the prior cycle peak. Real ADR gains are supporting development economics. Construction loans are available for hotels with strong brands and proven sponsors. Lower dollar value limited service hotels remain favored by developers given solid demand trends, low equity requirements and construction loan availability. Stronger share prices could bring REITs back to the acquisition market this year, particularly if regulatory-driven CMBS market disruption limits private investor appetites. Related Research All Inclusive: U.S. Lodging & Leisure Handbook (February 2017) 2017 Outlook: U.S. Lodging & Leisure (Sector Propped Up by Healthy consumer Demand) (November 2016) Stephen Boyd, CFA +1 212 908-9153 stephen.boyd@fitchratings.com
www.fitchratings.com
Christopher Gallun +1 312 368-3123 christopher.gallun@fitchratings.com
RevPAR Recovery Now the Second Longest on Record (YOY Change In TTM U.S. Lodging RevPAR)
Consecutive Positive RevPAR Growth Months
(%)
TTM RevPAR
15 10 5 0 (5)
112 Months
(10)
65 Months
77 Months
(15) (20) 1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
105
112
YOY – Year over year.TTM – Trailing 12 month. Source: STR, Inc., Fitch Ratings.
Record Cumulative RevPAR Recovery
(Cumulative Trough-to-Peak Cycle RevPAR Change) Early 1990s
(%) 60
Early 2000s
Late 2000s
50 40 30 20 10 0
0
7
14
21
28
Source: STR, Inc., Fitch Ratings.
35
42 49 56 63 70 77 (Months from Cycle Trough [T = 0])
84
91
98
Occupancy and Real ADR Well Above Prior Cycle Peak (Cumulative Trough-to-Peak Cycle RevPAR Change)
Early 1990s (92 Months to Recovery) Early 2000s (78 Months) (Occ. %) 66 64 62 60 58 56 54 $50 $60 $70 $80 $90 (Real ADR [Prior Peak Dollars]) Occ. – Occupancy.
Late 2000s (89 Months) Current
$100
$110
Source: STR, Inc., Fitch Ratings.
February 21, 2017