Broader economic and tourism trends are behind a downgraded outlook for the U.S. hotel industry in 2020, speakers from STR and Tourism Economics said on a recent webinar.
REPORT FROM THE U.S.—The odds of the U.S. economy entering a recession in 2020 have fallen to around one in four, according to Tourism Economics President Adam Sacks, but an inevitable slowdown in economic growth is a reality that the travel and hotel industries will have to live with for the foreseeable future.
Jan Freitag, SVP of lodging insights at STR, summarized the state of growth for the U.S. hotel industry: “Flat is the new up.”
Speaking during a recent webinar on the “U.S. economy and hotel industry 2020 outlook,” Sacks and Freitag offered guidance and color on a new STR and Tourism Economics forecast, released last week at the Americas Lodging Investment Summit, that calls for zero year-over-year change in U.S. hotel revenue per available room, as a result of slightly negative change in hotel occupancy and weak pricing power. (STR is the parent company of Hotel News Now.)
Five highlights of that conversation:
1. As GDP goes
One equation that doesn’t change: Gross domestic product (GDP) drives hotel demand, which drives performance.
“There’s not a one-word answer for hotel demand growth, but if I had to use a one-word answer, it would be GDP,” Freitag said, noting the two metrics are “joined at the hip.”
During the current 10-year economic upcycle—“127 months and counting,” Sacks said—GDP has grown 2.3% per year on average.
“We’re in the midst of the longest economic expansion in U.S. recorded history,” Sacks said. “It also bears mentioning that it has been the slowest economic expansion on record.”
GDP growth is expected to slow further in 2020, projected at 1.6% for the coming year. The main culprits dragging GDP down are investment and trade, he said.
The slowdown is felt “most acutely in trade,” as a result of trade wars, Sacks said. That is also translating into behavior around corporate investments, he said.
“Companies are expecting and planning to invest less over the coming year than they have been. The services sector is showing more resilient continued growth, but manufacturing is flagging,” he said.
Keeping the U.S. economy from fully retracting is consumer confidence, which despite taking a hit in recent months is “still higher than it has been really in 20 years,” Sacks said.
Slowing GDP growth leads to declining hotel occupancy and therefore “very, very, very anemic rate growth,” Freitag said.
“GDP growth matters a whole lot. It’s people in the workplace, on planes doing business trips,” he said.
2. Late-year surge ‘not a recovery’
The U.S. hotel industry got a confidence boost as December 2019 performance metrics came in strong, with a 2.6% increase in RevPAR, driven by ADR growth of 2%, according to STR data.
However, Freitag said this “monster December” and positive metrics in November, coming after two consecutive months of RevPAR declines, do not signify a recovery.
Instead, hoteliers should expect the norm to continue to be slow-to-no growth going forward in 2020, he said.
“Long-run-average occupancy is now basically at zero. We don’t expect to see that change much, and actually, occupancy is probably going to go into a decline,” he said.
3. Compression nights dropping
As group ADR continues to “grow at a healthy clip,” outpacing transient ADR by about three times, a stronger convention calendar in 2020 “might be the saving grace” for hotel performance, Freitag said.
Citywide events and conventions drive compression nights—when hotel occupancy is 95% or higher—and ADR premiums on compression nights are still high, he said.
The problem is, there’s “just fewer nights when that happens,” Freitag said, pointing to just 401 compression nights in 2019, the lowest since 2012.
4. International inbound travel recession
A marked slowdown in overseas travel to the U.S. is not helping hotel demand, Sacks said.
“International is part of the picture. A year ago, our analysis indicated that based on what was going on in economic conditions and exchange rates, international inbound was going to be tepid in 2019,” he said.
“It’s fair to say that’s how it turned out, with just over 1% growth in overseas travel to the U.S.”
Overseas travel to the U.S. grew, from 2011 to 2016, at an average of 6% each year; that dropped to just 2% growth in 2017, 2.5% in 2018, and as of the latest data available (November), was at 1.1% growth for 2019, according to Tourism Economics.
“That’s overseas. Factor in Canada and Mexico, both of which contracted in 2019, and we can say that 2019 was an inbound travel recession in the U.S.,” with seven out of 10 months showing a negative change in U.S. arrivals, Sacks said.
“Whatever demand increases we’re seeing, we’re not getting them from the international market,” he said.
A decline in Chinese visitors to the U.S., as a result of a coronavirus outbreak, is also likely to hit demand, according to analysis by Tourism Economics.
5. ADR not following occupancy
Defying expectations, U.S. hotels have not increased rates in line with rising occupancy, which has made ADR difficult to predict, the speakers said.
“When we compare ADR growth to the levels of occupancy, we can see that ADR has gone renegade from its relationship with occupancy,” Sacks said.
The two metrics in the past have tended to “move in a synchronized, proportionate way,” but 2019 data shows that “ADR has begun to decelerate even as occupancy has risen,” he said.
He added ADR that is significantly slower given the high levels of occupancy is “not a new situation,” calling it “the mythic change.”
The situation is not likely to improve in 2020.
“There’s not a lot of reason to think there is going to be new traction for ADR to accelerate as we move into the year, because occupancy is not going to rise,” Sacks said.
STR and Tourism Economics’ 2020 forecast calls for 0.3% ADR growth.
Freitag conceded the forecasts have been consistently “too bullish” on ADR growth.
“Is 0.3% too high in a higher-supply and lower-occupancy environment?” he said.