IRVINE, CALIF. — The U.S. hotel market faces many long-term challenges, including a slowdown in international travel, an increase in supply and a decrease in demand, according to the most recent Quarterly Hotel Monitor report from Ten-X, an online real estate marketplace.

The leading “buy markets” for hotels will be those that most strongly fight against these negative trends, while the top “sell markets” reflect the strongest negative forecast indicators.

According to the Ten-X reports, the top buy markets for 2017 are (1) Las Vegas; (2) Jacksonville, Fla.; (3) Sacramento, Calif.; (4) Los Angeles; and (5) Indianapolis.

The top sell markets are (1) Houston; (2) New York City; (3) Pittsburgh; (4) San Jose, Calif.; and (5) Northern New Jersey.

In Las Vegas, occupancy jumped 110 basis points in the third quarter alone to 73.4 percent and room rates also spiked dramatically, according to Ten-X. Meanwhile, supply has dwindled due to the closing of underperforming hotels, and the new supply pipeline is relatively small. These factors combined to make Las Vegas the top buy market.

In Houston, the top sell market, the prolonged oil price slump continues to take its toll. Energy and manufacturing jobs dropped 6.8 percent year-to-date through the third quarter of 2016, and hotel demand waned as well. The economic slump locally coincides with a “flood” of new supply hitting the market, with more on the way.

As a result, the occupancy rate in the Houston hotel market has fallen to 64 percent and revenue per room dropped 15.6 percent year over year. The report suggests that Houston is “especially vulnerable to a cyclical downturn in 2019 and beyond.”

“While our research indicates the [U.S.] hotel sector will see modest growth over the next two years, a number of factors continue to erode demand, right as a surplus of supply prepares to hit the market,” says Peter Muoio, chief economist for Ten-X. “While strong economic conditions in the West and other metro areas may still hold some allure, these dynamics are combining to make the market an increasingly risky bet for investors.”

Inside the numbers

Supply growth was 1.7 percent in the third quarter on a year-over-year basis, a new high for the cycle, while demand increased just 1.6 percent in the top 25 markets. This marked the second time in the last three quarters that supply outpaced demand, driving the occupancy rate in the top 25 metros down 20 basis points to a seasonally adjusted 65.3 percent.

Despite those troubling signs, room rates rose 1.2 percent in the third quarter and are now 3.3 percent higher than a year ago, causing revenue per room to make a corresponding jump.

Room rates in the country’s largest 25 metropolitan areas have now increased 2.5 percent over the last year, according to Ten-X, but continue to be dragged down by outliers such as Houston, which remains in the throes of an economic slump brought on by low oil prices.

Rates in the country’s smaller metro areas fared slightly better, increasing 3.6 percent year-over-year.

Consumer spending on hotels and motels has now hovered around the $100 billion mark for several quarters. That should help fuel slow growth for the sector through 2018, according to Ten-X’s forecast, which calls for annual room rates to increase roughly 3.5 percent and annual RevPAR (revenue per available room) to climb 4 percent this year and 3.7 percent during the two years to follow.

As GDP continues to slowly expand, hotel revenues should follow suit, and the occupancy rate in the top 25 metros is expected to hit a record high of 73.5 percent by 2018 before declining to roughly 68.7 percent amid an expected cyclical downturn, according to the Ten-X forecast.

Challenges ahead

Headwinds facing the industry include an unexpectedly strong dollar in the face of Brexit, making international travel less affordable for many people outside the United States, and a combination of oversupply with the advent of room-rental applications such as Airbnb reducing demand. The largest markets will suffer the most from these challenges, which is why New York City is considered a sell market in the report.

Business travel has also declined modestly year-over-year, and may continue to do so as videoconferencing and other technology-based communications reduce the need for travel.

The average price per key declined modestly during the third quarter to just over $150,000, though it remains nearly 7 percent higher than the same period in 2015.

The average capitalization rate, meanwhile, held steady at 8.5 percent during the third quarter, and has risen 30 basis points over the last year. Deal volume in the sector increased to roughly $7.6 billion during the third quarter — a jump of 6.6 percent over the second quarter and 2 percent increase year-over-year — but continues to fall well short of the cyclical peak it reached in early 2015.