Colorado Real Estate Journal - December 2, 2015
Hospitality is going to finish 2015 with a con tinuation of improving metrics that metro Denver has experienced over the last five years. Additionally, CBRE’s Hospitality research group, PKF, is forecasting continued growth for the next five years, but at a slowing pace. With 70 brokers exclusively working hospitality investments across the country and a dedicated debt and structured finance group for hospitality, CBRE is looking forward to 2016 with both optimism and caution. Optimism. Optimism extends from a couple of trends that became apparent in this cycle. First and foremost, revenue per available room, occupancy and average daily rates are forecast to steadily grow over the next five years. For this current year, the revenue per available room for Denver will show an increase of 9.9 percent. Nationally, we are expecting RevPAR to grow at a 7.2 percent rate. Occupancy is expected to remain fairly flat with only nominal growth going forward. The average daily rate is forecast to grow 7.6 percent this year, but gradually slow to a low of 2.5 percent in 2019. These metrics have been running at twice our long-run averages (1988-2014), which is encouraging. The lodging industry is a function of both national and local economic growth. We are fortunate here in Denver as tourism remains a growth industry and, other than the energy sector, all facets of the local economy appear to be stronger than most other parts of the country. Second , we are seeing lenders rely on social media sites like TripAdvisor. Actual customer feedback together with the hotelier response is now a part of underwriting a loan. This is helpful for the hospitality sector in more remote locations like tertiary markets or even small resort communities, including those like we have here in Colorado. Third, we are seeing the emergence of non-regulated lenders in the hospitality industry. These new capital providers are able to push leverage levels beyond the traditional level of 50 to 65 percent, going as high as 80 percent-plus. Nonrecourse construction financing also is available, albeit with higher coupons. We expect these sources to play an ever-increasing role in our industry. Finally, EB-5 financing had a higher profile and its ability to match job creation with capital investment is maximized with hospitality products. The time that it takes to structure and fund EB-5 investments is somewhat long, but it remains a cost-effective method to raise nonrecourse capital. There may be some changes to this program going forward, so we will be monitoring that situation carefully. Caution. On the caution side of our forecast, we expect to see the following issues impact hospitality. Permanent lenders like we have in the commercial mortgage-backed securities arena will trend operating metrics, which dampens the impact of a robust part of this cycle. By going back and averaging in 2013 performance with 2014 and this year, lenders are hedging their valuations to the conservative side. Second, the banking industry is now coping with the new regulatory environment created by Basel III and Dodd Frank. Issues such as new risk-based capital standards, new liquidity definitions and requirements plus revised definitions of “core equity” have the potential to limit lending activities. Although not fully implemented or even understood, regulations may have an earlier impact on the hospitality industry vs. other asset classes due to the perceived volatility of this business. The CMBS industry will shortly be hampered with some new regulations that require a level of personal liability for each securitization. Regulation AB will require executives to certify that deal information supplied to investors is accurate. As these capital providers struggle with a changing regulatory environment, credit spreads have widened out and much mystery surrounds the Federal Reserve’s handling of short-term interest rates. Long-term rates will be closely monitored as we move into another election cycle. Finally, on a national level CBRE has seen an increase in hospitality property sales where the transactions fail to close for various reasons. However, these owners who fail to sell are finding the commercial debt markets to be compelling alternatives with low long-term rates, higher values and aggressive leverage levels, allowing some to refinance and pull out tax-free proceeds. In summary, as the Denver Post used to say, “Tis a pleasure to live in Colorado.” Denver’s economy remains strong as job growth is matching the millennial in-migration; tourism remains strong; and local retail sales continue to expand. The Denver hospitality industry benefits from the infrastructure (convention center, Denver International Airport and transit system) that makes it the great city that former mayor Federico Peña envisioned some 30 years ago. PKF projects same store sales to grow at a rate greater than 6 percent in 2016. This keeps metro Denver in the upper echelon of 56 hospitality markets in this study. There are some storm clouds on the horizon but, clearly, metro Denver’s hospitality and lodging industry is positioned for an above-average runway. With 42,681 hotel rooms and a nice mix of upper-priced and lower-priced brands, the supply demand equation remains at equilibrium. There are 1,689 keys under construction with another 4,000-plus or minus in the pipeline. Long-term construction to permanent financing is not readily available; however, both the local banks and the debt funds are aggressively seeking lending opportunities. 2016 looks to be another banner year for Denver area financing opportunities in the hospitality and lodging industry.