Industry experts are projecting “more of the same” with weak revenue growth numbers heading into the first quarter of 2020.
REPORT FROM THE U.S.—Any expectation that the first quarter of 2020 will be when the hotel industry finally turns the corner in terms of performance, and breaks out of the low-growth doldrums, is likely to be met with disappointment, according to industry experts.
Jan Freitag, SVP of lodging insights for Hotel News Now’s parent company STR, summed up his expectations for the quarter as “more of the same, basically.”
“There will be continued, slow demand growth, in line with slow GDP growth, that will be outweighed by the steady growth in new supply,” he said.
For Q1 2020, STR is projecting a 0.6% increase in RevPAR, pushed up exclusively by average daily rate, which is expected to increase 1.1% year over year as occupancy decreases 0.5%.
Tepid rate growth lately has been a hallmark of the hotel industry. Freitag said ADR outpacing occupancy at the beginning of 2020 is tied to the fact that there is strong group demand in the quarter, although transient rate growth has lagged.
“We have been positively surprised by the continued healthy growth in group ADR and hope that would continue into Q1,” he said.
Mark Woodworth, senior managing director and head of lodging research for CBRE Hotel’s Americas Research, said his company is similarly projecting occupancy contraction in the quarter.
“Q1 2020 should see the fourth consecutive quarterly decline in the national occupancy level and the largest such decline … since Q3 2018,” he said via email.
Both CBRE and STR are projecting supply growth to hover around 2% for the quarter, ahead of projected demand growth of 1.7% according to CBRE, and 1.4% according to STR. Woodworth attributed “the modest escalation of economic headwinds,” including tariffs and political uncertainty, to the hotel industry’s inability to drive demand at the same pace as supply growth early in the New Year.
Scott Berman, principal and industry leader for the hospitality and leisure group at PwC, said he’s putting more and more time in to counseling clients to temper their expectations for the hotel industry. At the same time, he believes there are still rays of hope.
“I am concerned that Q4 will be even softer than the forecasted guidance though the optimism in me feels like Q1 could be better than expected with U.S. GDP growth anticipated to be slightly over 2%,” he said.
Wall Street analysts seem to have a similar outlook on the industry.
C. Patrick Scholes, managing director of lodging, leisure and gaming equity research for Suntrust Robinson Humphrey, said his firm expects RevPAR to be flat to up 2%, with “very strong levels of group business on the books” for the last month of the quarter (March) and the first month of the second quarter (April).
Both Scholes and Michael Bellisario, VP and equity senior research analyst at Baird, pointed to easy year-over-year comparisons with Q1 2019 as a driver of relatively strong group performance for the quarter. Scholes said it was partly due to Easter holiday and spring break calendar shifts, while Bellisario pointed to the 2019 government shutdown and the strong demand likely for the 2020 Super Bowl in Miami.
Freitag noted STR projects the Miami market to see its strongest-ever ADR growth in connection to the Super Bowl.
The question of an election year impact
The view that the industry might suffer from 2020 being a U.S. presidential election year might be misguided, prognosticators said.
“History says there is little to no impact (positive or negative) that can be attributed to election-year activities (at the national level),” Woodworth said. “Certain areas, primarily in the early primary states such as New Hampshire, Iowa and South Carolina, do see demand and price increases, but these are modest in nature and relatively short-term in nature.”
Freitag agreed, noting past data that pointed to possible election-year impacts could be attributed to other factors, such as broad economic recessions.
“There’s no material difference between an election year and a non-election year,” he said.
Bellisario said his firm expects the largest election impacts to be confined to the Washington, D.C. market in the second half of the year, particularly the actual week of the election in November.
“Our view is it’s a bigger/more impactful watercooler-type conversation to have (around the potential RevPAR impact) than an actual RevPAR impact,” he said.
Scholes noted the real impact is from politics creating overall economic uncertainty due to concerns both from impeachment proceedings and the ultimate Democratic Party nominee.
“Uncertainty in government can play out with a pushback in corporate travel spending (transient and group),” he said.
Top concerns heading in to 2020
Increasing costs and flat-lining revenues seem to be top of mind heading in to 2020.
“Labor supply (or the lack thereof) will continue to be the No. 1 issue faced by hoteliers,” Woodworth said. “There does not appear to be any relief in sight.”
Scholes noted the big challenge for hotel real estate investment trusts in 2020 will be “keeping margins flat/up in 2020, given flattish RevPAR growth.”
Berman said his “cautious optimism” for the hotel industry comes from a wave of good geopolitical and macroeconomic news in December, but there are still some things that present headwinds for global travel.
“One of the bigger challenges facing the lodging industry is a strong dollar, meaning it will continue to be more expensive for most foreigners to travel to the U.S. and therefore, international inbound visitation continues to decelerate, impacting predominantly the markets on the Atlantic and Pacific seaboards,” he said. “Also, the news … that Boeing has curtailed production of the 737 Max is also a headwind that must be accounted for as airlines try to manage their itineraries’ substantial seat growth.”
Markets to watch
Sources pointed to Boston and Chicago as a markets poised for a breakout in 2020.
Freitag noted a big question will be if San Francisco can keep up its strong pace from 2019, which was fueled by the reopening of The George R. Moscone Convention Center.
“Even if (growth is) flat in Q1 in San Francisco, that’s good because it was so strong last year,” he said.