Steady Growth and Changing Market Dynamics for the Hotel Industry
July 21, 2017
In reviewing the hotel market data, I am reminded of the 1967 hit Sonny & Cher song, “The Beat Goes On”. The song entered the Billboard Hot 100 chart on January 14, 1967, peaking at number 6. I think the song's message is basically, even as everything is changing, human nature remains the same. For the hotel industry, as much as things keep changing, the underlying beat goes on, and the tone is in a positive direction.
Its summertime now in the hotel industry, and indeed the beat goes on. The transaction market is HOT! MBA Hotel Brokers is seeing record hotel transaction activity. In Q2 2017, MBA closed on 6 hotel transactions. Primarily, we are seeing sales of cash flowing hotels, with sellers motivated to sell to cash out their equity. These most recent sales were in suburban markets in the mid-Atlantic and south east.
Our experience is echoed across the hotel industry. According to Real Capital Analytics, single asset hotel deal volume grew 30% year-over-year in 2nd Quarter 2017. Hotel sales volume is increasing in secondary and tertiary markets especially. 
Deal volume has remained strong for several years, though year-over-year transaction growth was negative for much of 2016 only as a result of the surplus of mega-deals in 2015.
The RevPAR beat also goes on with moderate growth. According to STR, in the second quarter of 2017, the U.S. hotel industry reported that occupancy rose 0.5% to 69.5%, ADR increased 2.2% to $127.43 and RevPAR rose 2.7% to $88.58 when compared to Q2 2016. June brought the 88th consecutive month of RevPAR growth (+2.8%) in year-over-year comparisons. 
The Federal Reserve’s interest rate increase in June by 0.25% is also a vote of confidence in the US economy. This is the third rate-increase by the Fed in the last 12 months. While interest rates on commercial mortgages and cap rate values will eventually be impacted by the rising U.S. Prime rate, for now, a strong economy is far more beneficial to hotel investors.
Currently, the Prime Rate is 4.25%. MBA Capital Funding, the financing arm of MBA Hotel Brokers, is seeing interest rates ranging between 5.00% to 6.00%+ with conventional mortgages on the low side and SBA 7(a) loans on the high side.
Cap rates are trending upward but cap rate increases have slowed. Real Capital Analytics reports that hotel
“Cap rates were up only 20 bps YOY Q2’17 versus a 40 bps YOY increase in Q2’16. Full-service hotels saw cap rates at 8.0% in Q2’17 while limited-service hotels were at 9.0% cap rate. Both levels are at the long-run average for these segments”. 
Recently at the summery NYU Conference, industry executives shared the opinion that this industry cycle might last longer than anyone has predicted. With market conditions like these, I fully share that view. For hotel buyers and sellers, the getting is good.
To quote another American classic song, “fish are jumpin’, and the livin’ is easy” for the hotel industry. Those lyrics are from the classic 1934 George Gershwin hit song “Summertime”, most soulfully sung by Janis Joplin in my opinion. As Wikipedia states “ Janis Joplin's version with Big Brother and the Holding Company has been highly praised. David Starkey in his article "Summertime" says that Joplin sings the song "with the authority of a very old spirit". May our summertime of a pleasant hotel market continue for years to come!
One reason MBA Hotel Brokers is enjoying a Summertime of high transaction levels is the maturity of our great team of hotel brokers, whose depth of knowledge and experience is being recognized by many hotel companies for driving superior performance in hotel transactions. If your portfolio needs some churning to maximize it's ROI to continue your Summertime, give us a call and we'll jump on it. There is an old expression, “If you want to get something done, ask a busy person.” MBA Hotel Brokers are busy, but we are selling hotels and have strong demand for more acquisitions at every level, so we are actively seeking to add to our inventory of hotel investment offerings, and would love to help you realize the highest possible results in your hotel transaction.
‘Til next time, Enjoy the Summertime!
Charlie Fritsch & Jaime Goss