Yahoo! Finance: The hotel sector benefits from 'muted' supply
Peachtree CEO Greg Friedman recently shared insights on the market with Madison Mills of the Yahoo Finance show Catalysts.
Safe Harbor in Choppy Waters: Hotels Resilient in Volatile Market
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The hotel industry has had a remarkable recovery in the post-COVID era, marked by strong fundamentals, limited supply and increased capital inflows, making it an attractive investment option.
Peachtree Group CEO Greg Friedman sat down with Bryan Younge, executive vice president at Newmark to discuss this remarkable recover and where the market is today. Bryan heads the hospitality practice group at Newmark and is a leading commercial real estate advisor. Below is a recap of his expert analysis and insights.
Listen to Peachtree's discussion with Bryan Younge, EVP Newmark here.
Hotel Industry Comeback
The industry witnessed an unprecedented come back after the pandemic.
Limited New Hotel Supply: Limited new hotel supply coinciding with high travel demand creates a favorable scenario for the existing hotel inventory to capitalize on the surging interest.
Investment Attractiveness: The hotel sector's resilience has increased its appeal as an investment vehicle, offering substantial returns. This is reflected in the significant capital and dry powder ready for investment in this sector.
Macro Challenges: Despite its success, the industry faces challenges like staffing shortages, wage growth and inflation.
Hotel Performance – Segment: Closely examined the performance across various segments of the hotel industry, including commercial, group, leisure, and extended stay, as well as different distribution channels. These channels are crucial for predicting occupancy trends and Average Daily Rate (ADR), especially in the current volatile inflationary environment.
Key observations include:
- The group segment, crucial for hotel revenue, experienced a significant decline during the pandemic but has recently fully recovered.
- Other segments, like online travel agents (OTAs) and FIT (Foreign Independent Travel) and wholesale channel, outperformed group and global distribution systems (GDS) in terms of recovery.
- The FIT and wholesale channel had a substantial initial setback but rebounded strongly in spring 2022, reaching levels 70% higher than in 2019.
- Seasonality patterns, resembling a heartbeat monitor, show three demand spikes in mid-spring, summer, and October, indicating a return to normalcy and balanced pricing strategies.
- Overall, the analysis suggests that while larger hotels faced challenges during the pandemic, smaller hotels remained more resilient due to less reliance on group bookings and other factors.
- The current trends indicate a recovery and adaptation in the hotel industry's various segments.
Predictive Analysis: Discussed methods for predicting future pricing trends in the hotel industry, including analyzing room rates and booking adjustments, the personal savings rate and its impact on the travel sector, and the performance of different hotel market segments and their recovery post-pandemic.
Transaction Market: An equilibrium is emerging in the transaction market, with buyers and sellers reaching common ground and avoiding distressed pricing. This indicates a healthy market with growth potential and abundant opportunities.
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Yahoo – Catalysts - The commercial real estate market (CRE) has struggled amid a prolonged high-interest-rate environment, but hotels have continued to outperform as demand surpasses supply. Peachtree Group CEO Greg Friedman joined Catalysts to discuss the market outlook.
Friedman explained that the pandemic "muted" new supply growth, and as demand has picked up with limited new construction, he believes the hotel industry is benefiting from supply being constrained. He points out supply in the hotel sector is growing at a 40% reduction, while demand remains resilient.
Friedman notes that "from an investment perspective," hotel assets trade at higher cap rates. With rates expected to remain elevated, Friedman states, "there's less negative leverage," making the sector increasingly attractive.
Regarding office spaces, Friedman sees potential for recovery. "I think we're heading towards a bottoming across the office sector," he said, pointing to rising vacant spaces being repurposed and transformed for new uses. "I think we're heading towards it being more investable," he added.
To watch more expert insights and analysis on the latest market action, check out more Catalysts here.
Peachtree Group's Market Update w/ Greg Friedman & Mark Zandi
Mark Zandi, Chief Econmist at Moody's Analytics joined Greg Friedman, Managing Principal and CEO of Peachtree Group for a 4th Quarter Market Update.
As we move into 2025, Peachtree Group remains optimistic about the U.S. economy. While risks persist—from policy shifts to stretched markets—the underlying fundamentals are strong. This sentiment was echoed by our recent guest speaker, Mark Zandi, Chief Economist at Moody’s Analytics, who shared his insights on the economy’s resilience and the challenges ahead, particularly for commercial real estate.
Economic Highlights and Key Insights
Mark emphasized the exceptional performance of the U.S. economy, with GDP growth expected to range between 2.5% and 3%, driven by increased labor participation and productivity gains. The labor market remains strong, with unemployment hovering around 4%, and households—especially those in the top income tiers—benefit from strong asset values and low debt-service ratios. However, he noted the pressures on lower-income households, who are feeling the strain of inflation and high-interest debt. This contrast contributes to a gap between strong economic data and public sentiment.
Risks and Projections for 2025
He outlined several key risks that may shape the economic landscape in 2025:
- Tariffs and Immigration Policies: Anticipated increases in tariffs and stricter immigration rules could amplify inflation and disrupt labor markets, especially in industries like construction and agriculture.
- Asset Market Volatility: Stretched valuations and policy-driven fiscal deficits could heighten market instability.
- Interest Rate Outlook: The federal funds rate is projected to decline to 4% by early 2025, with a further reduction to 3% by 2026. Meanwhile, the 10-year Treasury yield, a key benchmark for CRE valuations, is expected to remain flat, between 4% and 4.5%.
Commercial Real Estate and Private Credit
Mark highlighted the explosive growth over the past decade on private credit, now standing at eight times its 2010 size. While recognizing the risks of this rapid expansion, he noted that stabilizing economic fundamentals is a significant mitigating factor.
He also addressed the current state of CRE valuations, acknowledging a significant correction since 2022. Asset prices are down 10–20% from their peaks, depending on asset type, but he expressed cautious optimism for future returns as valuations in many segments approach fair value. Challenges remain, however, as muted transaction volumes and uncertainty around intrinsic values make price discovery difficult in a higher interest rate environment. However, he concluded by emphasizing that CRE, having undergone a meaningful correction, is uniquely positioned for potentially stronger returns.
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Schwab Network: 'New Game' with High-Interest Rates
Greg Friedman discussed on the Schwab network how the high rate environment is reshaping valuations and refinancing, with 90% of office vacancies concentrated in just 30% of buildings.
Schwab Network – Greg Friedman joins Nicole Petallides at the NYSE site with a deep-dive into the high rate environment facing investors right now. When looking at the 10-year Treasury rate which is "more than double pre-2022 average," Greg believes its reshaping valuations and refinancing dynamics. In the real estate realm, he sees uneven performance saying "90% of office vacancies are in just 30% of office buildings."