Despite long cycle, downturn indicators remain positive
Despite long cycle, downturn indicators remain positive
24 AUGUST 2018 8:07 AM

Based on past downturns, RevPAR decline, oversupply and consumer confidence emerge as early indicators to signal the end of the hotel industry cycle. Are those historical warning signs currently a threat?

NASHVILLE, Tennessee—As the U.S. hotel industry continues to set demand records and delay the end of the current cycle, hoteliers and analysts agree that performance growth will eventually lead to some sort of downturn.

But what are the clearest signs that forward momentum has ceased and the downturn has begun?

During a data session titled “Is there a canary in the coalmine?” at the Hotel Data Conference, Vail Ross, SVP of global business development and marketing at STR—Hotel News Now’s parent company—and Gerry Chase, president and CEO of Chase Hospitality Advisors, examined prior economic downturns in the early 1990s, the early 2000s and 2008 to determine any late-cycle patterns.

“One thing that we started to really recognize when we were talking about these different potential canaries … is really around consumer confidence and that whole fear factor,” Ross said. “One of the reasons why 2001 was so severe was due to fear—people just wouldn’t or couldn’t travel, they were afraid—and (the 2008 Great Recession) it was confidence in the economy and their financial ability to continue to travel and the impact that we saw on companies as well.”

Barring unpredictable outside forces like a terror attack or financial crash, Ross and Chase identified three possible symptoms of the current cycle’s declining health: decreases in revenue per available room at the submarket level, overbuilding and the impact of consumer confidence on transient demand.

Submarket RevPAR declines
A key warning sign that the cycle is ending is the RevPAR “tipping point,” Ross said, which is the percentage of STR’s 639 U.S. submarkets that reported RevPAR declines the month prior to total U.S. RevPAR decline.

(Slide: STR)

“In looking at the long-term period going back to 1989 to June 2018, if we look at all of these submarkets, it seems that tipping point is (43.5%),” Ross said. “So while in those downturns that tipping point was 50%, if we look at all of the submarkets it takes a little more than 43% for them to have negative RevPAR growth to see that negative impact of the total U.S.”

Chase said throughout his career he has mostly used the performance of the top 25 markets as the barometer for the health of the industry. Ross added that the tipping point for submarkets within the top 25 U.S. markets is about 45%.

The good news for the current cycle is the total number of submarkets throughout the U.S. experiencing RevPAR decreases is significantly below that threshold.

“We’re going to continue to monitor these, and we may not see many changes, but where we are today, if we look at all of the submarkets across the U.S., about 25% are experiencing negative RevPAR growth, so we’re far away from that 43.5%,” Ross said. “And if you look at the top 25 submarkets—the ones that are the largest that really have some of the most impact in those overall U.S. numbers—we’re at about 22% (experiencing RevPAR declines).”

The second possible indicator of the hotel industry’s decline is oversupply, or continued pipeline activity and supply growth significantly outpacing demand growth.

As of June 2018, the U.S. hotel industry reported 186,000 rooms in construction. Ross said 72% of those rooms being built are in select-service hotels, which is very different from the industry’s prior peak in December 2007, when 211,000 hotel rooms were in construction “and the majority of them were all full-service.”

“They were seeing themselves open up in one of the worst economic environments,” Ross said.

Chase said he has seen a significant increase in the number of select-service hotels being built.

“From a developer’s standpoint, if you look at full service versus select service,” Chase said, “today it takes you $150 million to $250 million to do a full-service hotel, where you can do somewhere between—depending on the property—a limited- or select-service somewhere between $30 million and $60 million, and it’s a little easier to get your equity up, to get your debt, and you’re going to do a few more properties and diversify a little bit better.”

Lenders also are being more selective in the projects they choose to finance.

“Banks are a lot smarter today, they’re a lot more careful what they do,” Chase said. “… I don’t think we’re going to get (hotel supply) too far out of whack.”

(Slide: STR)

Ross said oversupply hasn’t been a direct cause of a hotel industry downturn, but it often makes matters worse once the slowdown happens. She pointed to the supply uptick in 2007 before the Great Recession and said that could be a contributing factor to why it took the industry longer to recover than in past recessions.

“The good news is right now this is the longest stretch in which we have experienced demand growth outpacing supply,” Ross said. “So out of those 101 months of positive RevPAR, this has been one of those reasons we’re continuing to see that strong demand growth over supply. … It is one (canary) that has huge impact if a downturn was to occur, how we as an industry react to it, and as we know, every market is different.”

Consumer confidence and leisure transient
Since 2005, the gap between transient and group demand in the occupancy mix in the U.S. hotel industry has continued to widen, which Ross said is evidence of how confident leisure travelers are in the economy.

(Slide: STR)

“Transient has continued to be the bigger contributor to overall occupancy, and that is not going to change,” Ross said. “We don’t see that changing as an overall industry, about two-thirds of the rooms sold in the U.S. are sold to a transient consumer.”

Chase said leisure transient demand led the recovery following the Great Recession, something he admitted he hadn’t seen before.

“Leisure transient led us out of the last recession,” he said. “That happened before the corporate transient accounts started, which usually is first, then it’s group, and then it was leisure. But leisure actually dragged us out this time, so that may be something we want to watch in our markets.”

Which canaries are singing?
Ross and Chase concluded that there are no clear threats to the continued growth of the U.S. hotel industry when looking at RevPAR declines, oversupply or the confidence of leisure travelers. While it’s hard to predict a “black swan” event, Chase said the proper preparation and revenue-management strategy can keep companies flexible during a downturn and can lead to opportunities.

“If you have a good company, you’re really going to make hay from it,” he said.

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