Stocks of publicly traded hotel owners and operators underperformed benchmarks in 2018 and finished the year in negative territory, failing to deliver on widespread industry optimism that followed the passage of tax reforms in late 2017.

Forecasters expect average revenue per available room to grow in U.S. hotels in 2019, though at a lower rate than it did over the previous year. Growth expectations are flattening in part because the hotel business has been improving for about a decade and occupancies are already at record-high levels, observers said. Also worrisome, though, are signs that corporate executives expect to moderate their spending — some of it on travel — in the coming months.

Moreover, Jamie Lane, senior economist at CBRE Hotels, warned that expense growth for hotel owners is likely to exceed revenue growth, jeopardizing net operating incomes for real estate investment trusts that own hotels.

Robert W. Baird analyst Michael Bellisario said in an interview that various market participants have differing opinions about whether growth in RevPAR, the key hotel-performance metric, will speed up or slow down over the coming year.

"We're flat now," he said. "There's a group of people that are playing for a bounce, including us, and there's people that are asking about recession scenarios."

The 2017 tax reform legislation championed by President Donald Trump and passed by Republicans in Congress fueled optimism in the hotel business at the start of 2018, in part because of a widespread belief that higher corporate profits would fuel business travel. As the year progressed, hotel owners also got a boost from increased M&A activity in the sector, including Blackstone Group LP's and Pebblebrook Hotel Trust's pursuit of LaSalle Hotel Properties.

Around midyear, though, lower growth forecasts for 2019 raised investor concerns, and "the rug kind of got pulled out from underneath everyone's feet" in the lead-up to the fourth quarter's market-wide sell-off, Bellisario said.

Central to investor concerns were expectations for private non-residential fixed investment, a component of GDP that is of particular interest to hotel investors because it tends to align with business travel spending — a major driver of hotel bookings in major markets.

While hotel performance tends to track the metric, Fitch Ratings analyst Stephen Boyd said in an interview, a leading indicator for both is a survey from the Federal Reserve Bank of Philadelphia that tallies corporate executives' expectations for capital expenditures. The survey showed spending expectations were high at the start of the year, but fell sharply and leveled off around the end of the first quarter, foreshadowing a slowdown in hotel bookings and spooking equity investors.

Boyd said several factors remain positive for hospitality companies: Leisure travel is solid, unemployment is low, hotels should be able to adapt relatively well to rising interest rates because of their ability to adjust their rates from night to night, and corporate group bookings remain strong — though the latter is a lagging indicator of the industry's health because it hinges on business plans made months or years in advance.

Ultimately, though, hotel equity investors tend to respond more to acceleration or deceleration of revenue, rather than to absolute levels of the metric, Boyd said. As a result, he said, the suggestion of muted corporate capital spending expectations took the wind out of some investors' sails.

"I think around tax reform, people felt like there would be capital freed up for additional investment," he said. "But I think ultimately, in a low-GDP-growth kind of environment, some corporations opted for share repurchases and other return-of-capital avenues for shareholders. ... I don't think it was as great a stimulus to corporate capex as people had hoped."

CBRE's Lane said the pattern in 2019 — RevPAR growth of 3.5% to 4% in the first half of the year and 1.5% to 2% in the second half of the year, averaging out to about 3% for the full year — played out largely as his firm's forecasters expected, in large part because of difficult year-over-year comparisons to 2017 numbers in the second half.

"I would say a lot of the public companies maybe didn't clarify enough around that," he added.

In 2019, CBRE expects roughly consistent hotel performance throughout the year, with "sustainable" RevPAR growth of just over 2.5%, Lane said.

The tricky part for hotel-market participants may be managing expectations. Lane noted that average U.S. hotel occupancy, at 66.1%, is the highest the metric has ever been, and 300 basis points higher than the highest occupancy of the previous cycle, in 2008. The number cannot be expected to rise any higher, he said.

Yet, even with hotels largely full, operators have not been able to raise their rates as sharply as they have in past cycles. The explanation, Bellisario said, is that the rise of Airbnb Inc., coupled with greater pricing transparency created by online travel sites such as Expedia Group Inc. and priceline.com LLC, has sapped hoteliers' pricing power — maybe permanently.

Given levels of hotel demand and broader macroeconomic indicators, and based on expectations from previous cycles, "RevPAR should be higher, and it's not," Bellisario said. "The answer is that there are structural changes that have occurred that make it a little bit of an apples-to-oranges comparison."

Expecting a greater bump from tax reform may have been unrealistic, considering how little room the various drivers of hotel business have to improve, he added.

"The question is not, 'Are things going to be this good, and for how much longer?'" Bellisario said. "It's, 'Can they get better?' And that's what I struggle with. We're bumping up against a ceiling. There's only so many more people that companies can employ, there's only so many more trips individuals can go on, there's only so many more sales trips and calls that people can do."

The question for hotel optimists is what, if anything, in the current environment could cause travel spending to break out of its recent pattern to the upside.

"It certainly doesn't feel great," Boyd said. "I think everyone's doing OK, business-wise, and there's business to do out there, but it feels like there's headwinds, whether it's geopolitical concerns, trade concerns, political instability. ... It feels like caution is the watchword."