Hospitality trends 2016Observations from the annualWashington, DC, Hospitality Sector Roundtable

2 | Hospitality trends 2016

About this report• EY surveyed hospitality sector leaders in the Washington, DC, metro area and invited these

individuals to a roundtable to discuss the survey results and industry trends.• Our survey and discussions focused on the economy, transactions, capital markets, brands,

technology and the industry’s focus on trends affecting the broader US hotel market. The results of the survey are represented in the charts on following pages.

• All respondent and participant names have been kept confi dential, and their responses were used only in combination with others to maintain their anonymity.

EY would like to thank the individuals who took the time to complete the survey and who attended EY’s Washington, DC, Hospitality Sector Roundtable.

If you have questions about this survey or the Washington, DC, Hospitality Sector Roundtable, please contact Cathy Pryor at cathy.pryor@ey.com or Michael Selinger at michael.selinger@ey.com.

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The economyThe forecast for the US economy is for steady growth, despite the Fed lowering its gross domestic product (GDP) forecast for 2016 from 2.4% to 2.2%. However, the survey respondents were more pessimistic with 84% anticipating 2016 GDP growth between 1.0% and 2.0%.

Similarly, while hotel company stocks have declined from their highs in early 2015, the survey participants still anticipate revenue per available room (RevPAR) growth between 4% and 5% in 2016. While this remains below the annual growth from 2011 through 2015, it is above the longer-term historical averages and indicative of continuing strong fundamentals in the market.

Notwithstanding the moderate growth forecasts, 90% of respondents said the chance of a recession was less than 50% in 2016 and 2017.

0%

20%

40%

60%

80%

100%

Less than25%

25%–50% 50%–75% Greater than75%

Likelihood of recession in 2016 and 2017

2016 2017

84%

16%

Anticipated GDP growth in 2016

1.0%–2.0%

2.0%–2.5%

60%

40%

RevPAR expectations

4.0%–5.0%

< 4.0%

4 | Hospitality trends 2016

Wall Street’s downward push on hotel company values, driven by concerns about new supply and slower RevPAR growth, and the recent shift in the debt markets have driven a more than 50% decline in US transaction volume from 2015 to 2016 year-to-date, from $18b as of April 2015 to $8b in 2016. Additionally, the devaluation of hotels by Wall Street has shifted the mix of buyers from public companies to private equity and foreign buyers, with the proportion of foreign investors more than tripling from 15% in 2015 to more than 50% year-to-date in 2016.

With concerns about new supply, increased fi nancing costs and deceleration of the forecasted RevPAR growth, more than 70% of respondents qualifi ed themselves as holders or sellers of assets in 2016 and 2017.

Transactions

0%

20%

40%

Develop Buy Hold Sell

2016 2017

0%

20%

40%

60%

80%

Not a threat Somewhatsignificant

Significant Verysignificant

Impact of sharing economy

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Capital marketsWith an eye toward the regulatory environment and the quality of sponsorship, lenders have underwritten more conservatively and reduced proceeds on deals in 2016 compared with 2014 and 2015. Accordingly, more than 70% of respondents indicated their capital structures required a 40% equity investment during the prior six months, and they anticipate the same in the upcoming six months.

In addition to contributing to the decline in transactions in 2016, 65% of respondents viewed the restrained fi nancing environment as the biggest hurdle to development in the sector.

Furthermore, the mix of commercial mortgage-backed securities (CMBS) lending has declined to 14% in 2016 compared with 39% in the fi rst half of 2015 (for sales more than $10m). When surveyed, more than 70% of participants do not anticipate the return of the CMBS market to normalized levels until 2017 or 2018.

0%

10%

20%

30%

40%

50%

60%

2Q16 3Q16 4Q16 2017 2018

Anticipated return of CMBS market

0%

20%

40%

60%

80%

50%–50% 60%–40% 70%–30%

Capital structures(Debt–equity)

Past six months Next six months

0%

20%

40%

60%

80%

Landacquisition

costs

Financing Constructioncosts

Labor costs

Impediments to development

6 | Hospitality trends 2016

Brands

As such, it seems natural that more than 60% of respondents indicated a focus on this segment. Also, given the emphasis on millennials, respondents are most focused on investing in soft brands and select service products as well as in technology to enhance the customer experience and mobile applications.

Forbes reported in 2015 that there are 80 million millennials in the US, representing a quarter of the population and more than $200b in buying power.1 The G Brief, a blog run by Matt Heller about millennials as consumers, reports that they look for custom experiences, but are budget-conscious, having come of age in the Great Recession.2 Forbes also reports the group is brand loyal and very tech-savvy, with nearly 87% using two to three tech devices per day.3

However, nearly 80% of respondents believe there are too many brands. This may be due to confusion about brands among both consumers and hotel owners, increased competition within previously protected markets, increased costs and loss of market share.

0%

20%

40%

60%

80%

Millennials Gen X Baby boomers

Customer segment focus

0%

10%

20%

30%

40%

50%

60%

Soft brands Lifestyle Select service

Lodging products most ripe for investment

0%

20%

40%

60%

80%

Too many Too little Right mix

Number of new brands

1 “10 New Findings About The Millennial Consumer,” Forbes, http://www.forbes.com/sites/danschawbel/2015/01/20/10-new-fi ndings-about-the-millennial-consumer/#2265a31f28a8, accessed 28 June 2016.

2 “Millennial Expectations Are Reshaping Travel Industry,” G Brief, http://thegbrief.com/articles/millennial-expectations-are-reshaping-travel-industry-602, accessed 28 June 2016.

3 “10 New Findings About The Millennial Consumer,” Forbes, http://www.forbes.com/sites/danschawbel/2015/01/20/10-new-fi ndings-about-the-millennial-consumer/#2265a31f28a8, accessed 28 June 2016.

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TechnologyAs with many sectors, the hotel industry is using technology to improve performance and drive market share. Marriott’s chief information offi cer told The Wall Street Journal, “In the past, technology was used by Marriott associates to deliver services to guests. Now it’s being delivered to guests to consume our services, as well.”4 Survey respondents appear to agree, with 60% focusing technology investment on mobile applications and enhancing the guest experience. Another 25% prioritized social media and peer review sites to solicit guest feedback.

Respondents emphasized their focus on maximizing customer capture with more than 50% prioritizing mobile applications and yield management. Surprisingly, despite recent high-profi le cyber attacks, only 15% of respondents are prioritizing cybersecurity.

4 “Marriott’s CIO Says Mobile Apps Are Changing the Guest Experience,” The Wall Street Journal, accessed http://www.wsj.com/articles/marriotts-cio-says-mobile-apps-are-changing-the-guest-experience-1464660061, 28 June 2016.

Technology priorities

Focus of technology investments

Cost and effi ciency

10%

Cybersecurity 15%

Online presence

20%Yield

management25%

Mobile applications

30%

Social media25%

Data analytics15%

Mobile applications –

guest experience60%

8 | Hospitality trends 2016

Industry focusWhile health care, terrorism and immigration dominate headlines in the US, survey respondents indicate that the industry should be focused on issues directly impacting market share and costs. Concerns about the sharing economy topped the list of issues ranked by respondents, closely followed by online travel agencies and living-wage efforts around the nation.

0%

20%

40%

60%

80%

Not a threat Somewhatsignificant

Significant Verysignificant

Impact of sharing economy

However, despite indicating the sharing economy should be a top priority, most respondents indicated that its impact on the hotel industry was only somewhat signifi cant. This coincides with the industry sentiment that the jury is still out on the sharing economy’s effect on the lodging industry.

Ranking key industry issues

Americans with Disabilities Act

Health care Immigration Living wage Sharing economy

Online travel agencies

Terrorism

1 2 3

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Ernst & Young LLP participantsMichael Fishbin Principal Global and Americas Hospitality andLeisure Leader New York, NY+1 212 773 4906 michael.fi shbin@ey.com

Dante P. D’Egidio PartnerAssurance Leader (Baltimore, Greater Washington and Richmond) McLean, VA+1 703 747 1211dante.d’egidio@ey.com

Rob Arnall Partner Assurance Services McLean, VA+1 703 747 0833rob.arnall@ey.com

Dan Kotter Partner Assurance Services McLean, VA+1 703 747 1855daniel.kotter@ey.com

Michelle L. Montes Partner Assurance Services McLean, VA+1 703 747 1143michelle.montes@ey.com

Jim F. Sexton Partner Assurance Services McLean, VA+1 703 747 1213jim.sexton@ey.com

Brian TressExecutive DirectorNortheast US Hospitality and Leisure LeaderNew York, NY+1 212 773 8359brian.tress@ey.com

Bruce P. Kaminsky Associate DirectorTransaction Advisory Services,Real Estate and HospitalityPhiladelphia, PA+1 215 448 5143bruce.kaminsky@ey.com

Jordan R. DeDona Senior Manager Assurance Services McLean, VA+1 703 747 1029jordan.dedona@ey.com

Cathy PryorManagerTransaction Advisory Services,Real Estate and HospitalityMcLean, VA+1 703 747 0372cathy.pryor@ey.com

Michael Selinger ManagerTransaction Advisory Services,Real Estate and HospitalityNew York, NY +1 212 773 7992michael.selinger@ey.com

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About EY’s Global Real Estate, Hospitality & Construction Center Today’s real estate sector must adopt new approaches to address regulatory requirements and financial risks, while meeting the challenges of expanding globally and achieving sustainable growth. EY’s Global Real Estate, Hospitality & Construction Center brings together a worldwide team of professionals to help you succeed — a team with deep technical experience providing assurance, tax, transaction and advisory services. The Center works to anticipate market trends, identify the implications and develop points of view about relevant sector issues. Ultimately, it enables us to help you meet your goals and compete more effectively.

© 2016 Ernst & Young LLP.All Rights Reserved.

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.

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