Hotels had a great run in 2018.
The Tax Cuts and Jobs Act created new energy in the economy, particularly among business travel and group bookings. New occupancy records almost every month directly reflect this increased demand. While extraordinary average daily rate growth is elusive, rate stability and overall revenue growth are keeping pace with expense increases.
That said, hotel performance was a mixed bag, regionally. Many markets that suffered losses in 2016-17 came back in a big way, like New York and Miami. Other markets are starting to see the impact of increased supply, like Denver and Nashville. Generally, submarket conditions are driving investment decisions more than general economic forecasts.
Expect more of the same in 2019 with increased attention on macroeconomic indicators and more frequent predictions of an economic correction.
Employment, inflation, and interest rates are top of mind for all hotel investors right now.
Bond traders started talking about an inverted yield curve recently – a recession indicator. Cap rate compression is appearing in single tenant retail transactions. And traditional bank lending is slowing or changing to be more competitive with floating rate lenders.
“It’s different this time,” will be a common refrain at 2019 conferences (even though nobody will say it in those exact terms).
The lending community is more diverse and well-capitalized than in the previous business cycle. Their appetite for risk is considerably different. We see this in tapering hotel development, as lenders are ever more cautious about taking on that risk. Consequently, new supply additions are less likely in the coming year.
Federal Reserve officials are talking about a potential asset price bubble in commercial real estate. Simultaneously, they acknowledge that bank balance sheets are healthy and aggregate LTVs are sustainable. Still, expect this increased attention to the industry to drive many policy decisions in the coming year.
Primary Markets and Premium Brands
If search for yield was the theme of the prior three years, quality will be the new diva in 2019. Precarious geopolitical conditions combined with an uncertain macroeconomic forecast are pushing investors to stabilize their portfolios with sure bets.
Secondary and tertiary markets will likely continue to be liquid for owner-operator transactions. However, expect funds and asset managers working on behalf of major institutions to drive more dollars into primary markets.
Real estate is a time-honored inflation hedge and store of value. Long-term investors will look to preserve wealth in markets with strong secular trends, and leverage will be stress tested to a 2010-style downturn. These investors will seek to transcend the business cycle by underwriting with a long view in the rear view mirror as well as through the windshield.
Portfolio and entity transactions are the most efficient way to access this type of opportunity. Expect to see the big names – Blackstone, Starwood, and Brookfield – pick up the pace to deploy dry powder in this way before the music stops.
Digital personalization is moving out of the big data shops, like Netflix and Amazon, and into the hands of small operators. Artificial intelligence tools that help sort guests and recommend customer service interactions are emerging monthly. These tools will become even more critical to maintain a competitive edge in the future of hotel sales and marketing.
Social media advertising is now the preferred way to reach guests.
These marketing channels allow you to target messages to guest segments with granularity that you couldn’t even dream about a decade ago. Astute operators are taking this to the next level by creating unique offers that maximize direct bookings and increase loyalty.
Brands are jumping on-board by expanding and mining their loyalty programs. Marriott finalized the Starwood integration this year, and both Hilton and Hyatt made strategic alliances with well-known affiliate programs. The next step is segmenting and finely targeting guests with personalized brand and marketing messages.
Data, automation, artificial intelligence, and plummeting production costs are creating fertile ground for anyone to delight guests in a one-on-one conversation. Expect to see new personalization tools and techniques to fundamentally shift the hotel sales and marketing landscape in 2019.