Marcus & Millichap

2018 Hospitality Investment Forecast

National Report, 2018

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Executive Summary

National Economy
  • The new tax law could play a significant role in shaping both the economy and hospitality demand in 2018. A reduction in the corporate tax rate will be a windfall for corporations, encouraging several companies to increase investment in hiring, wages and business travel as a means to grow their sales.
  • The economic tailwinds over the course of the recovery have pushed small-business sentiment to a 31-year record level, reinforcing indications that both small-business travel and hiring will be strong this year. 
  • Healthy economic growth has driven consumer confidence to its highest level since 2000, highlighting the potential for vigorous consumption in 2018.
National Hotel Overview
  • Healthy employment growth and heightened consumer spending will drive hotel performance through 2018.
  • Supply will rise 2.0 percent with the bulk of hotels falling in the upscale and upper midscale segments. Overall, the majority of completions are located in larger markets with the most rooms under construction in New York City, Nashville and Dallas/Fort Worth.
  • New brands continue to pop up targeting different customer segments, like pod hotels designed for price-sensitive millennials. As hotels continue to realign strategies to compete for travelers, occupancy rates will benefit.
Capital Markets
  • The Federal Reserve has hinted at three to four increases of the fed funds rate during 2018 as it hedges against inflation risk amid accelerated economic growth.
  • CMBS and regional/local banks comprised more than half the share of hotel lending last year. In general, underwriting has become more stringent, though lenders are reducing credit spreads to remain competitive.
  • Tightening average first-year returns in several other property types could entice investors to seek the higher yields offered by hotel properties.
Hotel Investment Outlook
  • Investors have reaped gains over the course of the recovery through improving property fundamentals and pricing, but uncertainty around tax and fiscal policy slowed the pace of transaction velocity in 2017. As clarity on tax reform emerges, sales activity could increase this year amid reduced ambiguity.
  • Under the new tax provisions, owners can expense up to $1 million of depreciable personal property to furnish lodgings. The regulation could prompt some owners to consider smaller hotel assets for value-add potential.
  • Private investors are increasingly taking a larger share of transaction volume, comprising more than half of all capital flows last year. Many of these buyers are targeting hotels in the economy and upper midscale segments.

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