Don’t Be Fooled By Past Cycles

The president of U.S. hotel REIT Ashford Hospitality Trust urges real estate investors not to compare this cycle with previous ones, arguing it’s not about what inning the market’s in, but what’s happening in the game.

The president of the $4B hospitality real estate investment trust, Ashford Hospitality Trust, has advised institutional investors not to compare the current real estate cycle with past ones, saying this one is different.

With unprecedented capital flowing into the asset class and valuations for core assets often exceeding their 2007 peak, Doug Kessler says it’s natural for investors and managers to question where the U.S. commercial real estate industry is in the cycle.

However, he says, there is a “fundamental error” in comparing today to the past two cycles, specifically, “because it’s a function of what’s changed. You look at the past two cycles and you can easily say, ‘We’re six years into the recovery so that must mean we’re near the top.’

“People like to compare the cycle to baseball innings,” Kessler adds. “Well, the shortest game was 51 minutes, the longest inning was eight hours and the longest game was 23 hours. It doesn’t matter what inning we are in—it’s about what’s going on in the game. In those two past cycles, [hospitality] supply was exceeding demand, or certainly close to demand.”

Supply is expected to remain below demand for the next three years, with hospitality research firm PFK predicting occupancy levels in U.S. hotels will hit 65.6 percent in 2015, the highest level ever recorded and almost 4 percent higher than the long-run average. Specific markets such as New York, Austin, Pittsburgh, Omaha, and Miami will see room inventory rise by more than 4 percent by 2016, according to PFK, but it won’t dampen overall hospitality net operating income [NOI] growth.

In 2015 and 2016, PKF estimates revenue per available room (RevPAR) will increase 7.3 percent and 6.5 percent, respectively, and be largely driven by a room’s average daily rate. That means U.S. hospitality investors could see unit-level NOI growth in 2015 and 2016 of more than 10 percent, extending the streak of double-digit increases in hotel profits to six consecutive years.

“There are strong fundamentals that are still in play that certainly present a pretty solid case for more room to grow,” says Kessler, highlighting Ashford’s 2014 RevPAR growth of 9.9 percent.

Already in 2015, Ashford has closed on deals totaling more than $1B, including buying the remaining 28 percent stake in its joint venture of the 28-hotel Highland portfolio with Prudential Real Estate Investors for $490M. “We have been very active since the financial crisis, not just in buying hotel assets but also buying our own stock and creating value from within our own company [with the spin-out of luxury hospitality REIT, Ashford Hospitality Prime],” says Kessler.

Despite capital flows and competition, Kessler says the industry could also be on the “cusp of entering into a phase where there may be some consolidation opportunity” among players. “It’s a very dynamic market today and we want to be positioned at the right time in the cycle to have access to capital and these opportunities.”