As we enter the final quarter of 2024, the U.S. hotel industry continues to navigate a dynamic environment shaped by economic challenges and opportunities. At MMCG, a company that specializes in hotel feasibility studies, we’ve been closely following the trends in loan delinquency rates and performance metrics across different hotel classes. Our insights reveal that while hotel loan delinquencies remain at relatively subdued levels, other challenges like inflation, interest rates, and bifurcated demand are shaping the future of hospitality investments.
Stable Hotel Loan Delinquencies
A key indicator of hotel financial health is the delinquency rate on commercial mortgage-backed security (CMBS) loans, which in 2024 has hovered around 5.8%. According to recent reports, the lowest rate this year was in January (5.65%), while the highest was recorded in May (6.47%). These figures suggest that the lodging industry, despite facing rising costs and economic uncertainties, remains resilient. CMBS loans, often associated with larger full-service properties, provide a strong benchmark for tracking the industry’s overall performance.
Interestingly, the relatively stable delinquency rates contradict the expectation of a "wall of distress" in the hotel sector. Many investors anticipated widespread defaults that would lead to discounted buying opportunities. However, the accumulation of "dry powder" among private equity and investment funds has made bidding on distressed properties competitive, thus preventing the sharp price drops some hoped for.
The Impact of Lower Interest Rates on Refinancing
One positive development for the industry has been the Federal Reserve's recent pivot towards cutting interest rates. This change is expected to ease pressure on borrowers, many of whom are in a better position to refinance their loans at lower rates. For hotels, particularly those with adjustable-rate mortgages, this could improve debt service coverage ratios and provide relief from the higher payments experienced in recent years.
While the reduction in interest rates is favorable, it's worth noting that hotel deal flow and construction activity remain muted. In fact, room deliveries have stagnated, with the number of rooms under construction staying between 150,000 and 160,000 for more than two years. Higher financing costs and inflation-driven construction costs are the primary barriers to new development.
Bifurcation in Hotel Performance
Through 2024, the hotel market has been characterized by a growing divide between the performance of luxury and economy-class hotels. According to data compiled by MMCG, luxury hotels saw a modest RevPAR growth of 1.7% through August, while economy hotels experienced a 3.2% decline in the same metric. This bifurcation can be attributed to a few factors: robust demand from higher-income leisure travelers and corporate groups at upscale hotels, contrasted by weaker demand from budget-conscious consumers at economy hotels.
The demand for luxury and upper-upscale hotels, bolstered by corporate events and group bookings, has helped drive ADR (Average Daily Rate) increases despite the broader economic slowdown. In contrast, lower-end hotels, particularly those reliant on transient business travelers or cost-conscious guests, have struggled to maintain rate growth.
Occupancy and Market Variations
The U.S. hotel industry’s overall occupancy rate for the past 12 months was 62.9%, with a national ADR of $157.75. However, these averages mask significant market and class-level differences. For instance, luxury and upper-upscale hotels reported a healthy 67.4% occupancy rate, while midscale and economy hotels saw a much lower 55.2% occupancy. The success of higher-end hotels is largely tied to continued corporate group demand and the recovery of leisure travel among affluent guests.
Interestingly, markets such as New York and Nashville have seen robust construction pipelines, with thousands of rooms still in development despite overall stagnation in national room deliveries. This is an indication that while certain regions and hotel classes are thriving, the broader industry is still grappling with inflation, higher costs, and uneven demand recovery.
The U.S. Hotel Industry by State
The state-level distribution of hotels offers further insights into regional performance and opportunities. California leads the industry with 13,261 establishments, generating $36.1 billion in revenue and employing over 185,883 people, accounting for 15.6% of total U.S. hotel wages. Florida, another major market, boasts 7,892 establishments and generates $28.7 billion in revenue, while Texas follows with 13,467 establishments and $17.7 billion in revenue.
Conversely, states like Wyoming and North Dakota have smaller hotel industries, with Wyoming reporting only 822 establishments and $1.15 billion in revenue. These disparities highlight the importance of geography in understanding market dynamics, as states with high tourism demand or large urban centers tend to have more robust hotel industries.
Looking Ahead: Opportunities for Investors
While many hotel investors are taking a cautious approach, the environment remains ripe for strategic acquisitions, particularly in markets where supply remains tight, and demand continues to grow. Investors should be aware that higher construction costs and slow new supply growth may ultimately work in favor of existing properties, as limited competition supports ADR and RevPAR levels across many markets. Furthermore, with Fed rate cuts potentially on the horizon, refinancing opportunities could help improve profitability for many hotel owners over the next several quarters.
At MMCG, we continue to provide in-depth feasibility studies that highlight these critical trends. Whether you're an investor looking to capitalize on opportunities in the luxury segment or a hotel owner seeking insights on refinancing strategies, understanding the complexities of the current market will be essential for navigating the road ahead.
October 6, 2024, by Michal Mohelský, J.D., principal of MMCG Invest, LLC
Sources: STR (Smith Travel Research), Trepp, U.S. Bureau of Labor Statistics, Bloomberg
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