Rate, supply concerns weigh on latest US hotel outlook
 
Rate, supply concerns weigh on latest US hotel outlook
07 JUNE 2019 7:33 AM

Executives from STR and HVS talked data at the NYU International Hospitality Industry Investment Conference and how their outlooks on the rest of the year have changed.

NEW YORK—The pace of overall U.S. hotel industry growth has slowed, due in part to rising supply, growing expenses and less-than-aggressive pricing of average daily rate. But industry analysts point to some bright spots, like demand, group performance and a steady overall economy, that are contributing to forward motion, even if it comes at a slower pace.

Speaking at the NYU International Hospitality Industry Investment Conference, STR President and CEO Amanda Hite and HVS President and CEO Stephen Rushmore Jr. put the latest performance trends into context. (STR is the parent company of Hotel News Now.)

ADR, RevPAR and occupancy
Hite shared STR’s latest forecast, prepared in partnership with Tourism Economics, which calls for 2019 to end with 2% revenue-per-available-room growth—a slight downward revision from the previous forecast of 2.4% RevPAR growth for the year. The change was driven by a downward revision of ADR growth, from 2.3% to 1.9% currently.

Hite put the forecast in context with year-to-date performance numbers.

“We’re not falling off the train tracks; we’re continuing to chug along,” she said. “So far this year (April year to date), RevPAR growth has been 1.4%, and certainly we expect the second half of 2019 to pick up.”

She pointed to decelerating ADR growth as a contributing factor.

“For the last seven years, we’ve had (monthly year-over-year) rate growth of about 1%, and this year, three out of four months have seen ADR growth below 1%,” Hite said. “That’s not very confidence-inducing for the rest of the year.”

Hite also pointed out that taking inflation into account, the U.S. hotel industry has in fact seen declining ADR growth for the last three months.

Rushmore agreed that HVS is “not seeing extra RevPAR growth as a whole throughout the U.S.”

He pointed out the markets HVS predicts will have the most RevPAR growth over the next two years: San Francisco; Anaheim, California; Cleveland; Cincinnati; Chicago; Seattle and Atlanta.

Hite showed markets with the highest RevPAR changes so far this year, leading with Atlanta, followed by San Francisco/San Mateo, California; Nashville, Tennessee; Tampa/St. Petersburg, Florida; and Norfolk/Virginia Beach, Virginia.

On the occupancy front, she said some markets are seeing occupancy declines now, and the trend will continue in 2020.

Supply and demand, pipeline
Hite said STR’s data “still shows demand outpacing supply, but we do expect that by the end of 2019, those two lines will come together and meet.”

Four of STR’s six class segments (all but midscale and economy) now show supply growth outpacing demand growth.

“We see that resulting in negative occupancy across those classes,” she said.

Rushmore said, “I like to think we have learned, and as a result, I don’t think this cycle will have a precipitous drop-off like other (cycles) have had from an oversupply of hotels.”

HVS is keeping an eye on five U.S. markets in particular, not because they show oversupply, but because they’ve recently added significant numbers or have a lot in the pipeline, he said. Those include San Diego, New York, Nashville, Kansas City and Austin, Texas.

He also pointed out higher construction costs as a factor keeping supply in check.

“The feasibility of new hotels coming into the market has been increasingly challenging (because of construction costs), so as a result, the risk of new supply has been dampened,” he said. “You’re not seeing a lot of traditional banks lending on new construction, so I don’t think supply will be a major cause of the downturn for this particular cycle.”

Hite disagreed with Rushmore a bit in terms of overall impact of new supply.

“We think it’s certainly impacting the ADR growth in certain markets,” she said. “We’re at a 9.9% increase of rooms in construction and the under-contract pipeline is not slowing down at all. I don’t think it’s going to send us into a downturn or a recession—it hasn’t done that in the past—but it is affecting operators’ ability to drive rate.”

Segmentation
Transient performance has stalled recently, Hite said.

“Demand still has positive growth, but ADR has slowed a little, causing a deceleration,” she said.

Group performance, on the other hand, shows increases in ADR and demand.

“It will be interesting to watch ADR growth (on the group side),” she said. “The growth we see now was negotiated a year to two years ago, so in today’s environment, we’ll have to see how much confidence there is.”

Rushmore spoke about the vulnerability of the leisure segment in the coming years, attributing it to growing guest dissatisfaction with resort fees and best-rate guarantees.

“Resort fees are getting out of control,” he said. “They’re great from an investors’ perspective, but the way they’re being positioned to consumers is not transparent. More and more hotels are adding them, and it impacts leisure demand and creates distrust.”

He also said he sees a trend of guests disputing best-rate guarantees with brands and not getting resolution.

“About 90% of people who submit claims to hotel companies (for price matching) get rejected, and that creates distrust,” Rushmore said.

P&Ls, valuations, cap rates
During her presentation, Hite shared STR HOST P&L data, showing 2018 revenues and profits hitting all-time-highs.

“Of the $218 billion in total revenues, $165 billion was attributed to rooms revenue,” she said. “Profits at $80 billion were another all-time high.”

However, the data showed that expense growth continues to outpace revenue gains.

“The highest growth rate is insurance (+5.8%), and total labor expenses grew 4%,” Hite said. “When you look at (total RevPAR) at 2.9% growth, those fundamentals are difficult to sustain for very long.”

She pointed out that labor costs have always been less than revenue gains, with the exception of the last three years.

“Our labor cost growth rates are outpacing revenue gains, making it a very tough operating environment for hotels today,” she said.

On the hotel values side, Rushmore said HVS has not seen much appreciation over the past few years and the company expects values to remain stable in the near future.

“If you’re looking to invest in a property right now, though, I wouldn’t anticipate getting much of a market appreciation from the value,” he added.

Similarly, he said the company predicts cap rates will remain stable, “in large part because interest rates remain stable,” he said.

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