US forecast sees continued march to normalcy
04 MARCH 2014 7:16 AM
An updated forecast from STR and Tourism Economics calls for 5.3% RevPAR growth in 2014 and 4.7% growth in 2015.
WAYNE, Pennsylvania, and HENDERSONVILLE, Tennessee—STR, parent company of Hotel News Now, and Tourism Economics recently released the latest forecasts for United States hotel performance as well as for 25 individual U.S. markets. Our forecasts have been noted as the most conservative among the three major forecasters, which includes ourselves, PricewaterhouseCoopers and PKF Hospitality Research.
The fundamental rationale of the STR/TE forecasts relates to where we are in the hotel cycle in relationship to the overall economic cycle.
Our hotel performance models indicate that a transition to post-recovery period, “normal” growth is already underway for the U.S. Our view on this has been consistent for the past year.
In the spring of 2013 (the first joint STR/TE national forecast), we predicted demand growth of 2.1% for the year. This represented a step down in growth from each of the prior two years. Room demand grew in line with these expectations at 2.3%.
Our expectation that rate would drive most of the revenue-per-available-room growth was also met with average daily rate rising 3.9% in 2013. RevPAR grew 5.5% compared with our forecast of 5.8%.
All of these performance indicators follow the storyline of a reversion toward long-run averages.
As we analyze the underlying drivers of performance, our expectation is for RevPAR growth that slows further to 5.3% in 2014 rather than accelerating to a faster pace of growth.
Two dynamics are at work. The first is that improving growth prospects for the broader economy will continue to produce gains for the hotel industry. However, the second dynamic is that demand has gone beyond the recovery period where above average rates of growth should be expected.
While the U.S. economy is still operating below its full potential, with many people still seeking full-time employment, the economic outlook is better than in the recent past. If the year unfolds as anticipated, 2014 will shape up as the first year average gross-domestic-product growth has reached 3% in eight years (since 2005).
This expectation is based on a set of positive factors, many of which contributed to underlying strength in the economy that was gathering during 2013 but which was overshadowed by significant fiscal drag and policy uncertainty. For example, home construction activity is gaining; substantial investments are being made in the energy sector; and improving manufacturing competitiveness is supporting capital expenditures and hiring by domestic producers. Meanwhile, continued gains in equity markets and improving home values have boosted household net worth (up 22.1% since the start of 2012), which is expected to further support consumer spending growth.
Recovering to normal
A quickening pace of economic activity will be supportive of hotel demand growth. However, this support comes in the context of the ongoing transition from a rebound in demand to more normal growth.
The background is as follows: During the recession, hotel demand fell more quickly than the broader economy, and both demand and the economy reached a trough in mid-2009. In 2010 and 2011, the initial full years of the recovery, hotel demand rebounded, growing more rapidly than the broader economy. During 2012 and 2013, hotel demand growth was broadly similar to the overall economy, but the expectation for this year is that the hotel sector will take the next stage in the transition and revert to a growth rate of 2.3%, which is slightly slower than expected GDP growth.
This transition is consistent with economic principles. Over the long term, hotel demand tends to expand more slowly than GDP. At a fundamental level, this represents the balance between two broad relationships.
In the first, factors such as productivity gains and capital investment enable higher levels of output for given levels of input, allowing GDP (output) to grow faster than hours worked and hotel stays (inputs). In the second, factors such as growing real incomes, both domestically and abroad, and the changing composition of jobs in the shift toward an increasingly knowledge-based economy, tend to support stronger travel growth, with greater hotel stays per capita or per employee.
As a result, over the 26-year period from 1987 to 2013, real GDP expanded at a compound annual growth rate of 2.6%, while hotel demand grew only 1.9% annually (representing the stronger growth of GDP relative to roomnights), while at the same time, roomnights per capita (based on working-age population) and per employee reached historic highs of 5.2 and 7.7 in 2013, respectively.
With a favorable economic environment, and hotel demand growth that is expected to grow more quickly than supply in 2014 and 2015, we expect hoteliers will continue to achieve ADR increases. We anticipate ADR growth will accelerate slightly from 3.9% in 2013 to 4.2% in both 2014 and 2015.
The net result is an expectation of 5.3% RevPAR growth in 2014 and 4.7% in 2015, which, given the current low-inflation environment, is favorable compared to historical average RevPAR growth of 4.7% during years of economic expansion.
Adam Sacks is president of Tourism Economics, and Aran Ryan is director of lodging analytics at Tourism Economics. They may be reached at email@example.com and firstname.lastname@example.org.
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