US hotels have reached peak in demand, CMBS could be hurt: Fitch Ratings

Aloft Coral Gables, Surf Club Four Seasons and Hyde Midtown
Aloft Coral Gables, Surf Club Four Seasons (Credit: Field Condition) and a rendering of Hyde Midtown

The end of strong growth in U.S. hotels’ revenue and occupancy rates could hurt loan performance for commercial mortgage backed securities as interest rates rise, Fitch Ratings reported on Monday.

And Miami’s surge in new hotel construction is another warning sign that the cycle is headed downward, the rating agency said.

While Fitch maintains a favorable outlook for the hotel sector, the firm said demand has peaked and several key hotel industry metrics could turn negative by 2018.

“We’re now at the top of the cycle looking down,” Stephen Boyd, senior director of U.S. Corporates for Fitch said in a statement. “The trajectory of the economy, geopolitical shocks and the U.S. dollar will be key factors in shaping the market going forward.”

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Most hotel brands will likely see occupancy rates fall this year, with revenue per available room declines to follow in 2018. There may be differentiations among the hotels real estate investment trusts, depending on their market exposure. And loans maturing in 10 years will do so in a higher interest rate environment, Fitch said.

Additionally, rising construction levels are an early warning indicator that a peak in the cycle has arrived. Evidence of this is in New York City, according to Fitch’s Managing Director Huxley Somerville. It is now the worst performing market in the country with regard to growth in revenue per available room.

“Miami, Houston and Seattle also have hotel construction in excess of 15 percent of current supply, so we’re casting a wary eye on those markets as well,” Somerville said in a statement.

Among the new hotels under construction in the Miami area: the Aloft Coral Gables and the Hyde Midtown and the Surf Club Four Seasons in Surfside, both of which have hotel components. Ina Cordle