Data analysts at this year’s Hunter Hotel Conference said that while industry performance and overall growth might not hit the spectacular highs of 2015, hoteliers are in for smooth sailing this year.
ATLANTA—Barring an unforeseen event, the U.S. hotel industry cycle won’t face a downturn this year, and fundamentals indicate hoteliers have plenty of pricing power right now.
That’s the consensus of economists and data analysts who spoke at last week’s Hunter Hotel Conference. Examining both the larger economic picture and the data surrounding hotel performance, they concluded that while the pace of growth the industry experienced in 2015 is slowing down, those numbers should still make hoteliers happy this year.
The bigger picture
Anika Khan, senior economist with Wells Fargo Securities, shared some correlations between domestic economic changes and performance in the hospitality
industry. First, she said that overall gross domestic product growth has been slow since the beginning of the recovery from the latest recession.
“How long do we have to grow?” Khan asked. “It’s an important question in lodging because hotel demand is so closely correlated to overall GDP growth. We’ve been in this 2-2.5% growth pace for some time. In July we will reach seven years of economic recovery. An average U.S. business cycle is five years, so are we in the latter stages of this expansion?”
Khan noted that this particular cycle may last longer than most because consumer households still are faring well and labor markets continue to improve. Also, supply remains in check, which isn’t hurting either.
“We’re seven years into the cycle, and we know that U.S. economic growth and cycles don’t end of old age,” she said. “They end (because) of excessive building in the U.S. economy, like the tech boom … or of a monetary policy mistake.”
Continued gains in consumer confidence also help the hotel industry and spur more travel, Khan said.
“When you have a longer recovery, consumer spending … starts to reach middle- and lower-income workers, so it’s not a surprise that you’re starting to see economy hotel (performance) picking up,” she said. “It’s traditional in this stage of the hotel cycle.”
What the performance numbers say
Mark Woodworth, senior managing director of CBRE Hotels, also looked at the correlation of U.S. economic trends and hotel performance trends, which showed that over time revenue-per-available-room rate of change usually closely tracks GDP changes. Still, Woodworth said, slowing RevPAR growth does not necessarily indicate the industry cycle is close to the end.
Woodworth identified some markets projected to lead and others to lag from 2016 to 2018. He identified leading markets—including San Jose/Santa Cruz, California; Oakland, California; Orlando, Florida; San Diego; Salt Lake City; Anaheim, California; and Boston—as those that will achieve top 10 levels of annual RevPAR growth from 2016 to 2018.
What sets them apart? Woodworth said the leading markets will have stronger overall economic growth moving forward—in areas like employment—driving hotel performance. The laggards, on the other hand—Minneapolis; Seattle; New Orleans; Pittsburgh; Austin, Texas; Houston; and New York City—will show average supply growth of more than 2% above the long-run average.
“There’s a lot of supply coming into those markets,” Woodworth said, citing New York City in particular. “There’s tons of new capacity coming in, and what we’ve seen very consistently is that if you’re willing to offer a low-enough price, people will buy it.”
Jan Freitag, SVP of lodging insights for STR, parent company of Hotel News Now, emphasized Khan’s observation that while industry growth won’t hit the spectacular highs it did in 2015, year-over-year performance this year will be net positive.
“We’re 71 months in to (positive RevPAR growth) and it will continue to be positive,” Freitag said. “It’s not going to be amazing, but it’s going to be pretty healthy. This year we’ll see positive RevPAR growth every month. Next year we’ll see it for most of the months. It’s going to be interesting to see next year what happens to room rates once you see overall occupancies coming down.”
Freitag looked at chain-scale performance, noting that “in this part of the cycle, the majority of RevPAR growth comes from ADR growth.”
Lower chain scales are seeing more occupancy growth than higher ones, because “they’re full,” Freitag said.
“Luxury and upper-upscale segments are selling seven out of every 10 roomnights,” he said.
“That’s really healthy performance and should breed pricing power.”
On the pipeline side, Freitag said that while rooms in construction are up 17% over last year, it’s still below peak. As has been the case for a while, the majority of rooms in construction are select-service rooms in the upscale and upper-midscale segments.
When it comes to the forecast, STR’s numbers haven’t changed. The company forecasts supply to grow 1.7% in 2016 over 2015, demand to grow 2.3%, occupancy to increase 0.6%, average daily rate to grow 4.4% and RevPAR to grow 5%.
“We’re at a pretty healthy level of supply and demand imbalance in favor of demand,” Freitag said. “Sometime next year those lines will cross. But now we’re at all-time high occupancies so that should give you pricing power.”
Katie Moro, global director of business intelligence product at TravelClick, also identified trends that point to increased pricing power for hoteliers.
In TravelClick’s top 25 U.S. markets, business on the books for the next 12 months is up 4% over the same time last year, Moro said, and leisure is leading occupancy growth, up 2% over the same time last year from a roomnight perspective.
Both group business and leisure business on the books are both up year over year in occupancy and ADR, but transient business occupancy is beginning to slow.
From a channel perspective, Moro said brand.com bookings are up 6% year over year, which is strong, but online travel agency channel growth is strong as well.
And while the highest rates are still achieved through brand.com channels, Moro said the gap between rates on brand.com and OTAs are starting to narrow.
“From a rate standpoint, you can see brand.com did not grow as much as the OTAs did (so far this year),” Moro said. “I think people are still relying a lot on the OTAs.”