Julie Whelan:
So now we’re going to move onto our discussion and we’re going to focus on hotels and multifamily, two assets where consumer demand is less of a question, even if economic uncertainty is a short-term challenge. So to discuss multifamily and hotels outlook, I am joined by Rachael Rothman, Global Hotels Research, and Matt Vance, U.S. Multifamily Research. Welcome, Rachael and Matt.
Rachael Rothman:
Thank you Julie. Pleasure to be here.
Matt Vance:
Thank you Julie. Great to be here.
Julie Whelan:
Good to see you both. So Rachael, let's start with you. Last time we talked in 2023 Outlook, you indicated that easing international travel restrictions and uptick in business travel and even the trend towards “workcations” were providing optimism for the hotel industry. Does the slowdown in global growth that we've discussed change your outlook for the rest of this year and into next?
Rachael Rothman:
Well, if we could just set the table for a minute and take a quick walk around the globe and talk about what's happened in the first half of the year. In the U.S. we’ve seen room revenues up about 5%. In Europe, they’re up 20. And in Asia-Pacific, over 50. As you mentioned, this growth has been fueled by work flexibility, improvement in group business in the U.S., Americans’ strong desire to travel abroad, particularly to Europe, and the reopening of China and Japan. We do expect growth to slow as we move into the back half of 2023 and 2024. Of course, given the strong trends year-to-date, in addition, it can take time to add back long-haul flights and there has been some friction in the visa process, but as that eases, we do expect trends to resume. A few markets that we expect to be standouts going forward: In Europe. We'd like to highlight Italy, France, and Spain again, that strong U.S. consumer appeal. In the United States, markets with strong long-weekend demand, that would be Savannah, Anaheim and New York. And in Asia-Pacific, we do expect Singapore, to remain a standout market and we do expect to see strong growth in Japan, Thailand and Indonesia. Overall, as Ada mentioned, this moderating supply growth across the globe does give us a strong runway for growth and we are optimistic on hotels going forward.
Julie Whelan:
Hey, well that's great news and personally I feel like so many of my own family and friends are visiting Europe this year and all those countries that you mentioned. So those trends are certainly ringing true to me. I want to hop in their suitcase. So Matt, let's talk about multifamily for a minute. Over the last year, the conversation around multifamily has been focused on softer demand and a lot of development, which can usually create an imbalance in the market. But with interest rates that have risen and therefore the cost of mortgages being more expensive, do you expect this to actually drive an uptick in multifamily demand?
Matt Vance:
Well, Julie, the multifamily sector nearly rebalanced itself this year already. U.S. renter demand came back very strong in the second quarter, just as we've been projecting. It almost even kept pace with near-record supply. This is really important, because vacancy only moved up another 10 basis points. It returned to its long-run trend of 5%. Now the single-family market, on the other hand, is not balanced at all. We estimate there's a shortage of around 3.1 million homes nationally, and because of this market tightness, prices are up all right. And when you combine that with higher mortgage rates, buying a home has become extremely difficult for many. So I don't know, to answer your question, Julie, that this will cause enough of an uptick in demand to overcome some of the things that are or will be weighing negatively on new apartment leasing, things like a slowing economy, slowing job growth and other economic turbulence that we heard about from Richard. But it is absolutely helping to preserve existing demand and existing occupancies. And this is something property owners are very focused on right now is that preservation of existing occupancy.
Julie Whelan:
Yeah, it's easier to keep an existing customer than to get a new one, right? So what are your expectations for the rest of the year moving into next year? And you have any anecdotes that you can share with us about the story globally?
Matt Vance:
Absolutely. The same story that I just described applies throughout much of the world as central banks have grappled with inflation raised interest rates and the cost of buying homes. It's keeping renters renting for longer, virtually everywhere. So for the balance of this year, we expect healthy demand in the U.S, to come up just short of the pace of new supply. Vacancy will likely climb another 25 or even 50 basis points by the end of the year, which will weigh slightly on rent growth, which we expect to decelerate a bit further into the 1%-2% range later this year. Now beyond 2023, we expect fundamentals to settle into their long-term trends in the U.S., around 2.5% annual rent growth and more stable supply and demand dynamics. But other areas of the world all seem to be experiencing multifamily fundamentals that look a lot more like the U.S. did 18 or 24 months ago. Supply and demand imbalances are driving record-low vacancy rates and often double-digit rent growth across continental Europe. We're seeing it in Australia, the U.K. and elsewhere.
Julie Whelan:
Interesting dynamic. So Matt, another question for you. I just spoke with Ada and Jessica about the office market and we know that vacancy in the U.S. is elevated. It's likely to stay elevated for longer structurally because a lot of buildings are just going to become obsolete in this current environment. And this has led to a lot of discussion about what to do with those functionally obsolete buildings and maybe converting them from office to multi. So what's your view on promoting this kind of conversion? Is it going to help promote better communities in our cities?
Matt Vance:
Well, it is certainly complicated to make these conversions work financially, and some buildings are just simply difficult to convert because of the way they were built. But we have found that across the U.S. we see about 30 of these conversions each year. It represents hundreds of multifamily units, but with a housing shortage in the millions, as I said, it's not really moving the needle for supply. But it is more supply, which is a good thing for the long-term health of the residential market. That being said, these conversions can have a big impact at a local level. They preserve buildings which are often historically significant. They add hundreds of new residents to otherwise quiet blocks of the city and enhance the local livability and the live-work-play vibe of these neighborhoods.
Matt Vance:
We're talking with local and national policymakers about this topic, and there is a lot of strong interest among these groups to support this. We've seen public-private partnerships work in places like Kansas City, Chicago, and elsewhere. And we're seeing it this year in California, with $400 million earmarked in the budget just for these office-to-multifamily conversions, and when we break that down, that $400 million is really enough to bridge that financial gap between today's office property owners and multifamily redevelopers, and is enough to fund as many as 16 of the average office-to-multifamily conversions and really reshape as many as 16 historically significant city blocks.
Julie Whelan:
Really interesting. I think that with all of this change, it is really going to benefit our cities and I am very pro for having more people have more affordable living in our cities. 'cause I think it'll make all the difference. So Rachael, commercial real estate often has to adjust to disruptive forces. And Matt in a way just talked about using the disruption in office to the advantage of multifamily and ultimately the health of our cities. So one of the disruptive forces for hotels has been this growth in short-term rentals. Can you speak about how that trend is changing demand for hotels?
Rachael Rothman:
Absolutely, Julie. That is of course a hot topic in our industry. Short-term rentals have been around for a very long time, but the advent of web services like a VRBO or an Airbnb that dramatically increased access to short-term rentals and then COVID and social distancing spurred trial that many people may not have used in the past. Since COVID, just in these three short years, we've seen short-term rentals grow to close to 18% of what we might call hospitality room-night demand. That's up a full five percentage points. And of course, short-term rentals and hotels often fill different use cases or need states, but it's still important to remember that this shadow supply is competition that can impact any hotel in a given market in terms of both occupancy and pricing power. So something to be aware of for developers and owners as they move forward.
Julie Whelan:
Yeah, very interesting to keep on top of those local trends, I know that just this summer I've stayed both in short-term rentals with my family and hotels, and you're right, they definitely serve very different use cases. So thank you Rachael and Matt
