Summer Season Boosts Travel, Delivering Record Performance; Investor Caution Rising Amid Mixed Economic Outlook

Hotel sector delivers record performance. Historically low unemploy-ment is contributing to higher wages and elevated consumer confidence, supporting record travel this year. Sentiment is beginning to shift, how-ever, as subdued economic output and ongoing trade tensions heighten concerns of a potential downturn. Travelers are becoming more price sensitive and financial concerns may lead some people to shorten or delay trips, curbing hotel room demand growth. Occupancy is expected to remain flat in 2019, with muted inflation moderating revenue gains.

•    The U.S. experienced another record-breaking summer travel season this year as total domestic passenger air travel increased 3.8 percent year over year in July to an all-time high. Airlines carried more pas-sengers in the first seven months of the year than during any previous comparable period on record dating back to 2003. This trend is driv-ing demand for hotels in popular scenic destinations. 

•    Business travel is expected to remain strong this year, including to secondary market destinations. Small-business optimism remains well above long-term averages, indicating that owners remain positive about future prospects. Staffing increases and event participation will have an outsized effect on hotel demand in smaller metros. 

•    Tariffs on Chinese imports, including furniture and textiles, are rais-ing material costs for hoteliers at the same time that a labor shortage is contributing to greater employee expenses. These trends could combine to cut into hotel revenue.

Unaffiliated hotels lead deal flow. The hotel sector got off to a slow start in 2019 as transaction volume declined during the first half of the year. Economic uncertainty and financial market volatility clouded investor sentiment and contributed to the pullback. In many cases, a mismatch between buyer and seller expectations hindered exchanges. New capital nevertheless entered the hospitality sector, aided by cap rates that ex-ceed most other property types on average. Private investors completed the majority of transactions, followed by REITs and public institutions. Falling interest rates in recent weeks have widened margins further, which may encourage additional trades.