Rebirth of Lodging Industry

By Maria Maslovsky, Assistant Vice President & Analyst, Commercial Real Estate Finance, Moody’s Investors Service: The lodging industry continues to do well, with new supply growth still below 1 percent, although more pronounced in some markets, such as New York.
Maslovsky_Maria Headshot

The lodging industry continues to do well, with new supply growth still below 1 percent (although more pronounced in some markets, such as New York.) The key fundamental drivers – occupancy, average daily rate (ADR) and revenue per available room (RevPAR) – exceeded their previous peaks for the first time since the recession. Room demand is picking up again despite hiccups with shorter-term group bookings in the second quarter. Accordingly, the credit profiles of the four lodging REITs Moody’s rates remain stable, as does the rating outlook for the sector.

The U.S. lodging industry is finally returning to its previous performance highs:  as of end of August, and for the first time since 2006, occupancy, at 63.9 percent, has exceeded its prior record of 63.2 percent.[1] Similarly, ADR, at $110.28, exceeded its previous record high of $107.42 in 2008, and RevPAR, at $70.51, its prior record high of $65.56 in 2007.[2] Still, in light of the seasonally weaker fourth quarter, full-year results might not top previous records until 2014. The consistent improvement in lodging fundamentals is underpinned by a very positive supply/demand balance, with demand growth exceeding supply growth by approximately three times as of August.[3] Strong transient bookings and lender caution contribute to this favorable equilibrium. Absent negative exogenous events, lodging fundamentals point to a long but slow growth phase for the current hotel industry cycle.

In line with the positive fundamental picture, the lodging REITs Moody’s rates have maintained consistent credit profiles, with leverage remaining largely the same and fixed charge coverage improving slightly, as the exhibit shows.

REIT column chart

According to the leading forecasts for the hotel industry, occupancy is likely to grow approximately 1.5 percent per year in 2013 and 2014, with ADR rising between 4.2 percent and 4.8 percent and RevPAR

increasing between 5.7 percent and 6.4 percent.[1] A healthy and steady pace of growth suggests greater longevity and consistency of earnings.

The risks to this favorable view of the lodging industry include primarily macroeconomic considerations, such as an unexpected slowdown in GDP growth, additional fiscal tightening in the U.S. or any dramatic political or monetary shifts.

[1] According to Smith Travel Research.

[2] Ibid.

[3] According to Smith Travel Research, demand had grown by 2.4% while supply had increased by 0.8%, as of August 2013.

[4] Average of for August and September 2013 forecasts from Smith Travel Research, PricewaterhouseCoopers and PKF Hospitality Research.