In the first part of a new series, the Hotel News Now editorial staff answers your most pressing questions about the hotel industry. First up: How close is the next downturn, or has it already begun?
Editor’s note: You ask. Hotel News Now answers. In this occasional series, we pose your questions to industry experts for answers, opinions and advice on everything from the big-picture stuff, like where we are in the cycle, to small potatoes, like whether to serve mashed or au gratin on the breakfast buffet. Submit your questions to HNN Senior Managing Editor Robert McCune at firstname.lastname@example.org.
REPORT FROM THE U.S.—It’s the question on everybody’s minds: How near is the economy to a recession?
Given the standard length of hotel industry upcycles, hoteliers agree the industry is past due for a downturn. But when that recession might hit and what hoteliers can do to prepare are open to interpretation.
In fact, at last week’s Hospitality Asset Managers Association meeting, hotel asset managers agreed the next recession might have already arrived due to persistent labor issues and decreases in international travel to the U.S. But Justin Epps, VP at Watermark Capital Partners, said the next downturn won’t look like previous recessions.
“This time around the management companies are basically telling you, ‘I don’t know where else I can cut,’” Epps said, adding it was easy to find “a ton of fat” in hotel operations during the last downturn.
Jan Freitag, SVP of lodging insights at STR—parent company of Hotel News Now—said there’s still reason to be optimistic that a recession is in the distance.
“Growth in the U.S. hotel industry is closely related to growth in the economy as measured by private domestic investment, a subset of GDP,” Freitag said in an email interview. “We have seen over time that when American consumers are spending, and when American companies are investing, the outcome is more lodging demand. So far the outlook for GDP is positive, according to our colleagues from Tourism Economics, hence we do not expect that lodging demand will decline. It is true that growth in hotel demand will slow, but the outcome will still be positive, just not at the levels we have seen.”
Oversupply might be reaching a tipping point, which could lead to hoteliers slashing room rates, Freitag said.
“Of course, demand is only part of the equation—supply growth is the other number operators are watching,” he said. “We expect that in the next couple of quarters, the rate of supply and demand growth will be roughly in line, meaning that there will be no occupancy growth, or even slight occupancy declines. And then the main question is all about rate growth, specifically: How will hoteliers react when their occupancies are declining? As our 2020 ADR forecast shows, we do not expect a whole lot of pricing power to materialize.”
Slowing transient and group demand in some of the prominent U.S. markets is also worth monitoring.
“An indicator worth watching that could point at an economic slowdown is transient and group demand in the top 25 markets,” Freitag said. “As American companies ponder a way to boost their bottom lines, cutting the cost of travel and training are obvious choices should there be a sales slowdown. STR would see that behavior in our midweek numbers.
“And if more Americans get laid off, obviously weekend leisure demand and revenue will also slow as people preserve their money.”
Here’s a recap of the downturn discussions hoteliers have had in 2019:
At the Hotel Data Conference, STR VP of Client Services Chad Church presented on the accuracy of recession forecasts, concluding that economists are often wrong about the timing and severity of a recession.
“Economists often do not predict a steep-enough decline of GDP, and predict it will happen later than it actually happens,” he said.
In an analysis of past U.S. recessions, STR Senior Director of Financial Performance Joseph Rael wrote labor costs decreased by 9% in 2009 as the U.S. economy struggled and hoteliers sought creative labor solutions.
“Labor costs are generally perceived as a variable expense, but there’s also some fixed component to labor costs,” Rael wrote. “Hotels can reduce hours in slow periods, but only to a certain point, and also cannot simply hire/fire full-time staff on a daily basis to keep pace with demand.”
Carter Wilson, SVP of consulting and analytics at STR, presented on the rate cuts during in the last recession and how they hurt everyone.
Wilson said “rogue hotels” were the first to cut rates by 10% or more, and others in their comp sets soon followed.
“Big disclaimer: There were no winners in 2009,” he said. “Every hotel lost substantial (revenue per available room); they just did it differently.”
Hoteliers are still trying to be nimble in the current economy despite concerns about labor, the effects of the U.S.-China trade war and the regulatory environment.
“It’s a tough time right now to hold profitability,” said Leslie Hale, president and CEO of RLJ Lodging Trust, at the ALIS Summer Update in Washington, D.C. “The question becomes how much of it is a function of where we are in the cycle versus how much is a permanent paradigm shift, particularly given the movement of wages, insurance, taxes.”
At the NYU International Hospitality Industry Investment Conference in June, IHG CEO of the Americas Elie Maalouf said he’s encouraged by some positive signs—such as a growing middle class—that will continue to boost the travel industry for decades to come.
“I can’t tell you what exactly is going to happen in the next quarter, what (revenue per available room) is going to be in 2019 or 2020,” Maalouf said. “I do know that three to four years ago, we sat around here and talked about the end of the cycle and a downturn, and if we at IHG and many of you had stopped back then and said, ‘OK, let’s batten down the hatches,’ we actually would have missed out on some of the best opportunities, the best brand launches, the best growth we’ve ever had.”