US, global concerns weigh on Mexico outlook
US, global concerns weigh on Mexico outlook
03 MARCH 2020 8:44 AM

While Mexico is always affected by the economic health of the U.S., an economist speaking during HVS’ 2020 Mexico Hotel & Tourism Investment Conference noted the country has a higher exposure than normal this year.

Editor’s note: All quotes in this story were derived from presentations at the Mexico Hotel & Tourism Investment Conference that were conducted in Spanish and translated by event staffers in real time.

MEXICO CITY—Both the Mexican hotel industry and the country’s larger economy face significant hurdles in 2020, most of which are tied to similar turbulence faced by its neighbor to the north.

Speaking during HVS’ 2020 Mexico Hotel & Tourism Investment Conference, Delia Paredes Mier, executive director of economic analysis at Grupo Financiero Banorte, said that the various headwinds the U.S. faces, including a tumultuous election cycle, are likely to have significant impact on Mexico.

She noted U.S. elections have, historically, not been a huge factor for the Mexican economy, but this year seems different.

“We have a population that is quite divided with an erratic president who has a high probability of being re-elected. … And on the Democrats’ side, we could have a radical candidate, which is a risk for the economy and markets,” she said.

And despite a first-phase trade agreement in place between Mexico, the U.S. and Canada, Parades Mier noted Mexico still faces trade headwinds and has exposure to ongoing trade battles between the U.S. and other countries or governmental bodies, like China or the European Union.

Like other speakers at the conference, she noted Mexico is in a position where it’s often impacted by global upheaval, and is likely to face significant headwinds from issues like the spread of the new strain of coronavirus called COVID-19.

“It’s one of the most relevant things … especially in the tourism sector,” she said. “We still have to ask what the consequences will be.”

She said hoteliers should expect these risks to persist.

“The geopolitical risk are here to stay, especially as the cycle goes down,” she said.

Mexican performance
Rico Louw, client account manager of central U.S., Caribbean and Mexico for STR, noted Mexico has struggled with poor supply-demand dynamics in recent history, with 3.1% supply growth in 2019 compared to a 0.5% contraction in demand. (STR is the parent company of HNN.)

Overall, revenue per available room fell 5.8% in U.S. dollars from 2018 to 2019 and 5% in pesos. Louw said that’s part of a yearslong trend.

“The scenario from 2010 to 2014 represents good demand growth, but eventually supply started to outpace demand,” he said. “You can see in 2017 RevPAR was under the 0% growth horizon, and it has continued to decline for two years in a row.”

Among the chain scales, luxury hotels struggled the most in 2019, with a 1.2% drop in average daily rate and a 3.1% drop in occupancy. Economy and midscale hotels both saw rate growth offsetting occupancy declines. While all of the chain scales saw occupancy declines, only upscale hotels were able to overcome them via rate growth, with a 0.2% decline in occupancy and a 1.6% increase in rate.

Louw noted Mexico has a total pipeline of 37,600 rooms with 16,700 currently in construction. There is a heavy concentration of new supply coming to Cancún (4,750 rooms) and Riviera Maya (2,458 rooms).

Lorea Arnoldi, senior project manager at HVS in Mexico City, noted that the long-term trends for the country are still overall positive, though, with rate growth better when denominated in pesos and strong manufacturing activity in the automobile and aerospace industries as the country continues to diversify away from oil dependence.

Several markets enjoyed rate growth in pesos over the past decade but contraction when denominated in U.S. dollars, she said, including Mexico City, Guadalajara and Querétaro.

And even some that have seen growth in both currencies are significantly stronger in pesos, like Monterrey, which was up 8.1% in pesos from 2013 to 2019 but just 1% in dollars. Similarly, Tijuana was up 9.4% in pesos from 2014 to 2019 but just 1.7% in dollars.

She noted the country enjoys a high level of interest from international and domestic brands. She expects the global trend in the hospitality industry of increased mergers and acquisitions activity to soon reach Mexican shores.

“The trend of M&A has been very active at a global level,” she said. “I don’t doubt that will get to Mexico very soon.”

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