Hospitality N Illinois

RevPAR for the course – Midwest hospitality market strong, but tougher times might be ahead

Robert Habeeb

The hotel landscape across the region—as it is across much of the nation—is as strong as it has ever been. That is not hyperbole, either: Demand is up to near record levels, and demand in July was so robust that the month came in as the second best month on record.

by Robert Habeeb, president and chief executive officer, First Hospitality Group

Anyone asked to assess the state of the Midwest hospitality market today would understandably have to include plenty of qualifiers in their appraisal.

The hotel landscape across the region—as it is across much of the nation—is as strong as it has ever been. That is not hyperbole, either: Demand is up to near record levels, and demand in July was so robust that the month came in as the second best month on record (the best on record was July 2015).

That is the good news. The flip side of the coin, however, is that the strong growth in demand has been accompanied by a significant spike in supply, which has been on the rise for some time now. Experienced industry professionals, as well as thoughtful analysts and observers, have been cautioning that supply was increasing at an unsustainable pace. That is the reason why, despite big numbers and healthy markets across the region, the consensus outlook from those in and around the industry is not as rosy as casual observers might expect.

With strong and growing markets across the region, caution—or even pessimism—can feel somewhat counter intuitive. But while the roller coaster might still be going up, it has just about reached its peak, and anyone who has ridden a roller coaster knows what comes next.

We are currently at a kind of tipping point: Supply has finally caught up with demand, and will almost certainly outstrip demand in 2017—if not in the latter months of 2016. The current state of the market can best be described as one of equilibrium: supply and demand are in balance. RevPAR growth has slowed significantly, and will likely continue to sputter. I expect that slowing to continue through the rest of this year, probably in the 2 percent range or less. Next year, however, I actually think we will start to see RevPAR numbers going backward.

While these trends are playing out front and center in my home market here in Chicago, the story in the Windy City is not all that different from other Midwest markets where we are seeing the same general pattern (to varying degrees) in cities across the region.

Most markets are at or approaching equilibrium, with RevPAR declines already in progress or on tap for the not-too-distant future. Indianapolis, for example, is doing really well at the moment, but has a lot of supply on tap that will be coming online. Milwaukee and Minneapolis are also seeing supply in the pipeline.

There are a few exceptions to that pattern that are worth noting. While they may be more or less on the same trajectory, smaller or secondary markets like Omaha and Des Moines that have not really seen the same level of supply growth are actually in a better position today relative to the Midwest’s larger urban markets. In those small or mid-sized markets, the roller coaster is further from the top, and there is reason to believe that the pattern of growth may continue on the upswing for a bit longer.

Perhaps unsurprisingly, given what is likely to be a leaner and more challenging hospitality landscape in 2017, we are already seeing some constriction in the capital markets. Lenders are starting to smell the potential for some softening and are tightening lending restrictions. While we have yet to see any downstream impact, that is something that will inevitably slow the pace of development.

When it comes to international investment—something that has figured heavily in a number of Midwest hospitality marketplace discussions in recent years—it is worth noting that the surge of international investment in cities like Chicago and Detroit has somewhat slowed. Inbound money from overseas, particularly from China, continues to be an important piece of the investment puzzle, but we are seeing that level off somewhat as the Chinese government begins to impose restrictions on capital exportation (out of a desire for Chinese investment groups to keep their money in the country).

While 2017 (and possibly beyond) will almost certainly call for some belt-tightening for hotel owners, operators and investors, it is important to recognize that the upcoming slowdown will likely be nowhere near as severe as the last recessionary cycle. What is in store for the industry in 2017 looks to be part of the natural cyclical ebb and flow of the industry, not a catastrophic recession like the late 2000s.

The only caveat? There are always some potential game changers out there that could tip the scales: Zika virus, a significant spike in gas prices (perhaps precipitated by a dramatic geopolitical event in the Middle East), an unexpected negative shift in the economy, expanding national security threats or even unanticipated interest rate hikes (for any number of reasons). Not all of those would be disastrous, but they could each have an impact that would reverberate throughout the industry, and hotel owners and operators would be wise to keep their ear to the ground.

Robert Habeeb is president and chief executive officer of Rosemont, Illinois-based First Hospitality Group.