Hotels in America are reaching record levels
By Roxanne James

US Hotel Performance Climbs to Record Levels in 2015

According to credit agency Fitch Ratings, hotels in America are reaching record levels of occupancy and profit, although in some markets the sector appears to be moving beyond its peak. In its quarterly update of the four major property types, Fitch recorded stability in hotel, multifamily and office, while the retail sector struggles on.

The US hotel sector has posted 59 consecutive months of revenue per average room (RevPAR) growth through July, benefitting from the tailwinds of favourable demand barometers and with low oil prices working in their favour. Fitch also sees positive signs for refinancing existing commercial mortgage-backed security deals, increasing property values in a landscape of continued low interest rates and limited supply

In its report, Fitch Ratings identifies four markets, including its hometown of New York City that should be watched for potential oversupply. Along with New York, which has by far the largest number of rooms under construction, other development hot spots include Houston, Seattle and Miami.

Although low oil prices bode well for most US hotel markets, they are detrimental for Houston and Calgary, as both areas dominate America's oil and gas sector and have been hit hard by declining oil values. Other macro events, such as the impact of California's drought laws on resorts with water attractions of golf courses, need to be taken into account, as does the possible dampening effect of the strong dollar on international tourism.

Another property sector with five years' strong growth behind it as well as tailwinds for its future, multifamily also is marked by the prospect of "significant" increases in supply for some markets, Fitch says. That portends vacancy increases in some markets; citing data from commercial real estate researchers Reis, Fitch says Washington DC is already there. The apartment vacancy rate in the nation's capital has moved upward from 4.2% in the second quarter of 2012 to 6.9% in Q2 of this year, as "record new supply in the market over the past two years has been slow to be absorbed".

Reis predict a vacancy increase for Houston as well, according to Fitch, with the energy hub's new supply outpacing demand by 2019. That's the case even as some multifamily projects may be postponed amid uncertainty over the impact of low oil prices on its economy. Conversely, Fitch notes that the diversity of Houston's economy makes it difficult to gauge that impact, while in the near term, the city's apartment vacancy has continued to trend downward, falling 100 basis points year-on-year to 5.7% at the end of the second quarter of 2015.

Conversely, the office sector in Houston has seen vacancies increase to 15.6% from 14.2% a year earlier. Its construction pipeline is the largest of any US city with 11 million square feet to be developed in coming years, exceeding even the 9.5 million square feet in the pipeline across New York City.

Outside of Houston, Fitch is keeping an eye out for a potential "tech bubble" in the Bay Area as well as Seattle, Boston and New York. That's the case especially as certain tech-heavy submarkets in those cities, such as Midtown South in Manhattan and Cambridge/Route 128 North in Boston, have seen year-on-year rent increases of more than 7%.

Retail vacancy across the US has reached a new low, while rents have achieved modest growth of around 0.6% over the last 12 months. Fitch note its concern that continued store closings along with underperforming class B and C malls in secondary and tertiary markets will drag the retail sector down. Among the retailers announcing or having implemented closings recently include Gap, Macy's and Golf Galaxy.

Despite mixed results from the different sectors of America's commercial real estate sector, in general the outlook is highly positive, despite declining oil prices dampening growth. As a testament to improved affluence resulting from economic recovery, America's residential housing sector is proving to have the most potential for continued growth as buyers seek the security of home ownership as confidence increases.


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