It has been quite a while since my last post, but I am proud to say that my crystal ball is still operating! The naysayers were proven wrong, despite a ceaseless deluge of political drama, and the economy keeps rolling along. No! we are not soaring by any means, but I will take 2.6% GDP growth any month of the year. As we continue one of the longest and slowest post war economic expansions, it appears that the political turbulence and resultant gridlock in Washington DC has allowed the FED to continue to run the economy—and that has been to everyone’s benefit!
The pundits point out that consistent slow growth is underperforming our potential; however, after surviving the worst financial downturn since the great depression, I believe most of us are quite content to be growing at all. But, “What does all of this mean for hospitality investment?” you must now be wondering.
At the risk of sounding as boring as our slow growing economy, I continue to echo the tune from my last post. Occupancy growing, rate growing, revpar growing—all good signs for hotel investment given the continued low yields available from the debt markets. Moreover, the political turmoil and enhanced market risk is keeping “irrational exuberance” at bay, and this means new hotel supply, while growing, is still well within anticipated demand growth. While there are pockets of overbuilding, the supply/demand balance is in good shape when taken as a whole.
Globally, political turmoil (a la Brexit or North Korea) have also dampened investor enthusiasm, but the dire predictions of economic stagnation have been well off the mark. Europe continues to heal as the ECB keeps their foot on the “low interest rate” gas pedal, and that recovery is a solid underpinning for overall global demand. Again, slow and steady growth has been good for hotels, and solid revpar growth looks to continue for the foreseeable future in Europe and the UK.
Nonetheless, the pessimists continue to rattle their sabers, most commonly pointing to the all-time high levels of the stock market which typically precede an inevitable correction/crash. However, the pessimists miss the salient point that earnings are also at all-time highs and, importantly, by no means in a period of rip roaring growth. Keep in mind that slow growth which is both sustainable and predictable means lower risk (higher investor confidence) and higher earnings multiples. Couple that with low fixed income yields, and the stock market is arguably fairly-valued. With this backdrop of investor confidence, capital continues to flow to hotels.
What could ruin the hotel investment party this time? Well, the first issue is always “lack of a date”. Many hotel investors assumed that the “Wall” of CMBS maturities arising this year would spur an avalanche of distressed deals. Although opportunities have surfaced from this arena, these deals have been nowhere near as numerous as predicted. Moreover, the attractive debt yields and stable operating environment have made refinancing an attractive alternative to selling. Consequently, we have heard numerous complaints about the dearth of good investment opportunities. This phenomenon has forced investors to spread their nets wider and will clearly benefit sellers in secondary markets—a theme I highlighted in my last post.
But assuming investors can find an opportunity, the biggest risk for hotel investors today is that the economy actually accelerates rapidly, which would force the FED to raise interest rates (and hotel borrowing costs). The FED hitting the brakes too hard is the number one risk for our industry, because the “double whammy” of the resulting economic contraction coupled with higher rates can quickly put a hotel upside down on debt service coverage. Fortunately, we continue to see discipline in the lending markets (perhaps stoked by fear of a downturn), and acquisitions are being financed conservatively. Spectacular returns are certainly hard to find, but solid returns are still quite achievable.
While I am annoyed by the tweeting and finger pointing and the resultant political turmoil in Washington, if the knock-on effect is a continuation of slow, steady-as-she-goes management of the economy by the FED, that is a fine outcome by me–and hotel investors!!