Performance forecasts underscore a lack of pricing power in the industry, but hotel demand remains strong, experts say.
LOS ANGELES—New revenue, performance, supply and demand forecasts from STR, CBRE Hotels Research and Kalibri Labs reflect a U.S. hotel industry dealing with a lack of pricing power amid a relatively stable economy and persistent demand.
“The real story is the lack of pricing power, and we’ve revised (average daily rate) growth for 2020 to 0.3%,” STR President Amanda Hite said. “While the economy has somewhat stabilized, there’s nothing telling us hoteliers will have more pricing power in 2020 than they’ve had the last year or two.”
Mark Woodworth, senior managing director for CBRE Hotels Research, said the industry faces “not just a lack of pricing power, but a real absence.”
CBRE tracks real ADR benchmarked against occupancy, and those numbers typically run in tandem, he said.
“We’re trying to understand this issue and how it relates to the sharing economy and its implication on traditional hotels,” he said. “There’s a suspicion that the idea of high occupancy leading to scarcity, which drives prices up, may no longer hold true.
“ADR levels will run in sync with occupancy,” he said. “If we don’t see much change in occupancy going forward, perhaps we won’t see change in ADR moving forward.”
CBRE currently forecasts 1.1% RevPAR growth in 2020.
On the guest-paid revenue side, Kalibri Labs CEO Cindy Estis Green said her firm forecasts a slowdown in growth this year to about 1.3%. Guest-paid revenue reflects the amount paid by a guest to the hotel or third party, including markups for net rates.
Kalibri Labs forecasts net revenue growth in 2020 at “only about 0.9%,” Estis Green said.
She also said the U.S. hotel industry collectively has lost about 36 basis points of revenue capture, the number reflecting how much a hotel keeps from what guests pay.
“That means revenue may increase, but we’re able to keep less of it,” she said. “As RevPAR has grown, it’s masked this reduction in revenue capture.”
Estis Green attributed some lack of pricing power to static channel mix that may not optimize high-value channels, as well as a tendency for hoteliers to compare rates with others in their markets, leading to “a race to the bottom.”
Supply and demand
STR revised its 2020 supply forecast down from 2% growth to 1.9% growth, which Hite said “isn’t because there are fewer rooms in the pipeline; it’s because of the amount of time it’s taking these rooms to open.”
The U.S. hotel industry enjoyed record-setting demand in recent years amid lower supply numbers, and while that won’t happen in 2020, demand is still there, Hite said.
“The best news of this forecast is that we revised demand up slightly (to 1.6%),” she said. “We think the economy is stable. We see GDP growth of 1.7% in 2020, so there will be demand growth.”
Consumer confidence is another highlight, “and will drive the demand growth this year,” Hite said.
“One thing I want to see is an increase in capital investment from corporations. If we see that flow in 2020, we could have a more positive outlook for rate,” she added.
Growing supply does have an impact on hoteliers’ ability to raise rates, the speakers said.
“It’s not just hotel supply—it’s short-term rental supply. We have a lot of flexible supply that wasn’t there before,” Hite said. She said STR tracked 140 fewer compression nights in 2019 than it did in 2018.
Woodworth added that for that reason, it’s critical for hoteliers to “understand everybody you’re competing with and how they’re priced.”
As more attention is paid to margins and profitability in a cycle shift, the speakers said hoteliers must look at all angles to drive revenue.
“You can’t cost-cut your way to profitability,” Hite said. “In 2020, (owners and operators) are concerned with how to drive profit growth and cost-cutting will be on the table. Pay attention to labor; we can’t control the wage increases that are happening, so everything you can do for culture and to keep people engaged is time well-spent in this environment.”
Estis Green said “if anyone’s looking for new costs to try to manage,” cost of acquisition is a good place to look.
“You may not be able to raise rate or cut many expenses, but you can manage your business mix,” she said. “It’s low-hanging fruit—hotels haven’t paid that much attention to it.”