STR and Tourism Economics share insights in preparation of the release of the latest U.S. lodging industry forecast, scheduled for later this month.
BROOMFIELD, Colorado, and PHILADELPHIA—Each quarter, as we prepare to update the STR-Tourism Economics United States lodging forecast, we analyze and summarize key presumptions.
(STR is the parent company of HNN.)
For the upcoming update, timed to be released on 25 January as part of the online Americas Lodging Investment Summit Winter Update, we consider these factors:
- Pandemic timeline
- Economic conditions
- Expected response of lodging demand by segment
The broad strokes of the pandemic timeline remain largely intact. Our previous lodging outlook, released 13 November 2020, assumed that one or more vaccines would become available and start to combat against COVID-19 in early 2021, making 2021 a year of two halves, with the second half experiencing much stronger levels of travel activity than the first.
However, our prior outlook did not anticipate the extent of the winter surge in infection levels—an occurrence that has increased health risks and renewed restrictions in many areas. Even with the positive news associated with actual vaccination programs underway, it is now clear that the first quarter of 2021 will remain quite difficult, with a public health crisis that will continue to suppress travel and make it difficult to plan future travel. Currently, fourth quarter lodging performance in 2020 is tracking slightly below our November forecast.
As a result, relative to our prior release, our outlook for demand levels in the start of 2021 is likely to be somewhat weaker. Looking further ahead, with vaccination programs underway, we continue to assume that meaningful progress against the virus will be made by the middle of the year, and travel activity will start to improve markedly. Specifically, our current pandemic assumptions are as follows:
- Substantial progress against COVID-19 is presumed during the first half of 2021. Through successful ramp-up of vaccination programs, compliance with public health guidance and improved testing, disease prevalence is presumed to decline while immunity levels presumably rise. By the end of Q2 2021, COVID-19 infection rates are presumed to be low.
- By the end of Q3 2021, broad-based restrictions on group events are presumed to be lifted across almost all markets, though with some risk mitigation requirements continuing.
- In Q4 2021, the U.S. is presumed to be largely “safe from COVID-19,” with limited infections still occurring.
Our economic presumptions, which will reflect the upcoming Oxford Economics January forecast, are expected to be slightly more positive than our prior forecast. In the broader context, the rebound of economic activity remains slow and incomplete as recent data points to a slow start for 2021, with the health situation worsening, employment softening and spending moderating.
The long-awaited $900-billion federal COVID-19 relief bill is months late, but it should help buffer the current economic slowdown. As increased government transfers and broad-based vaccinations take shape, Oxford Economics now anticipates a mini-summer boom, helping boost GDP growth to 4.5% in 2021 (compared to 3.6% growth in the November outlook), after a 3.4% contraction in 2020 (compared to -3.6% in the November outlook). Even with slightly stronger growth this year, the current outlook still expects it will take until Q3 2023 for U.S. employment to recover to its prior peak level.
Response of lodging demand by segment
In this context, the travel recovery will continue to hinge on the performance of key demand segments. Leisure, which has returned more quickly than the other segments albeit in modified form, is anticipated to recover further this spring and summer, as progress is made to contain the virus. Pent-up demand for travel among higher income households—many of which have been less negatively impacted financially—is expected to result in quite strong travel activity to some areas. Travel preferences are expected to continue to favor outdoor, drive-to destinations, though leisure trips to urban areas are also expected to begin to improve. In contrast, business transient travel is expected to remain heavily suppressed, likely only starting to meaningfully improve in Q3.
Group travel recovery is expected to take longer than the other segments and be highly differentiated by event type and location. Small groups are anticipated to resume gradually beginning in Q2, though likely somewhat more gradually than anticipated in our prior outlook. Even as restrictions on group events are progressively lifted at local and regional levels going into the second half of 2021, the absolute levels of group room nights are expected to remain well below 2019 levels. As a result, group demand in Q4 2021 overall may remain 35% below the level experienced in Q4 2019 (compared to 20% to 30% below in our prior outlook), due to the lags in event planning and production, risk aversion on the part of participants and organizers, meeting facility space constraints and lingering effects of the economic recession.
This segment-level view supports a continued expectation that 2021 will be characterized by a rebound in travel activity as the year proceeds. Hotel room rates are anticipated to recover strongly in the time periods and market segments with the strongest demand, such as leisure markets during weekend and summer periods, but overall, average room rates are expected to remain well below 2019 levels.
Overall, as we continue to maneuver through the ongoing pandemic, we presume that it will take both a sustained recovery of demand and steady increases in room rates for the hotel sector to recover its prior pricing industry-wide.
Kwabena (Kobe) Akuffo Owoo is a research analyst in STR’s Research and Development division. Aran Ryan is director of lodging analytics for Tourism Economics.
This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.