Positive market performance projected for the rest of 2016 and well into the next five years - by Jim O'Connell

James O'Connell, O'Connell Hospitality Group

The ALIS Boston Summer Series event was held on July 19th with 227 people in attendance representing 26 states and six countries. More importantly, 17 participants from publicly traded REIT’s, large pension fund advisors, major national lenders and other industry leaders gathered to present their opinion for where we are in the real estate cycle, today and for where we are headed for the next few quarters as well as the next few years.

The crowd was happy to hear that continued positive market performance was projected for the rest of 2016 and well into the next five years. The dramatic upswing for market performance is going to be tempered and will mirror national GDP growth. Unlike the last big meltdown we experienced in 2007 – 2008, there are no major “bubbles” on the horizon that should cause anyone to be concerned. 

Growth in the United States and around the world is anemic and it is expected to remain weak. GDP is projected at 1% - 2% for the foreseeable future. That is expected to keep interest rates low. The Federal Reserve may raise .25% or so, but that isn’t expected to be a blow to the investment system. Wage inflation is a concern. Especially with Obama and the left pushing for increased minimum wages. However, those increases are expected to be overcome by continued, slow, RevPAR growth in the 2% - 3% range.

New supply is starting to be a concern in Boston and around the region. According to Pinnacle Advisory Group of Boston, new supply in Boston is expected to jump in 2017 and 2018. Actually, new supply is coming on line in many of the major markets throughout New England. In northern New England, places like Bangor, ME., North Conway, N.H. and Burlington, VT. have had new supply additions and also have been squeezed by the weakening of the Canadian dollar and the lack of travelers from across our northern border. In many cases, the lack of Canadian travelers has accounted for as much as a 15% drop in revenue. Couple that with supply additions and we have several hotel projects that won’t meet initial projections.

The hotel industry, across the country is experiencing record occupancies never seen before. Boston will finish 2016 at over 81% Occupancy. This causes compression into the suburbs so everywhere along Rte. 128 is jammed as well. That makes I-495 look very good. As an example, rather than pay $300 per night, bus tours are getting pushed out to Andover, Natick, Framingham, and Marlboro for $120 per night. That is expected to continue. Until the new supply comes on line in Boston during 2018. Then, the elastic band is expected to snap back a bit.

The hotel transactions market slowed dramatically in the first half of 2016, compared to 2015 and 2014. In the 4th quarter of 2015, publicly traded hotel companies were hit hard by projections that forecasted a slowing of RevPAR growth. Those stocks are off 30% - 40% in many cases.  This had caused a ripple effect in the bond market. The CMBS market shunned the sale of hotel debt and the dearth of good financing terms slowed the acquisition of many hotel projects across the country. That stigma has dissapated and an appetite for higher yielding hotel debt has returned. But it is like a freight train starting up. Inertia and momentum take time to increase. It is anticipated that debt markets will continue to remain strong and interest rates remain low for the next two to three years. Negative interest rates for European government securities will continue for quite some time. This causes major investors around the world to buy United States treasuries in a flight to quality, despite our own yields at +/-2%. This phenomenon is expected to continue and really is the backbone for continued low interest rates for real estate debt. 

In closing, it looks like the turtle is going to win another race over the rabbit. Slow, plodding, anemic, boring, no fun, nose to the grindstone sort of stuff for the next few years. We will be skiing the flat “green” runs for a while with no “double black diamonds” around the corner!

James O’Connell is principal of O’Connell Hospitality Group, LLC, Danvers, Mass.