Signs are pointing to a healthy end to 2018. Here’s what the industry is expecting based on economic performance reports from STR, Tourism Economics and Oxford Economics.
We are now well into the ninth year of the current economic recovery, making it among the longest period of recovery in U.S. history. How long it will last is anybody’s guess. However, based on what’s happening in the hospitality industry, it looks like a strong third and fourth quarter are upon us in 2018.
Property investors, developers and lenders have remained relatively disciplined and lenders are requiring real equity behind their mortgages. The window could be limited as interest rates are on the way up, but increasing interest rates are usually a sign of economic growth.
With consumer confidence at an 18-year high, employment and most economic indicators remain strong. A few years ago, many of us, including myself, felt the economy would be flat to up very modestly at this point in the economic cycle. It has been well over 100 months since we hit the trough in 2009. Tax reform reduced regulations and the strength of our nation could keep this robust economy going and dramatically enhance it. Supply growth has begun to moderate somewhat, in part due to high construction costs and lender restraint.
Oxford Economics expects 3.1% global GDP growth in 2018, the strongest performance in seven years. This is being driven by low interest rates, supportive credit and the fastest world trade since the financial crisis. Despite the mounting threat of more protectionist trade measures, we expect the impact on global growth and trade to be mild. This should provide a supportive economic base for travel to the U.S. in both 2018 and 2019. Economies of major U.S. source markets are all expanding.
Economic growth is expected to slow somewhat in 2019 across most markets, according to a majority of economic pundits. Their comments include U.S. exposure to the reduced benefit of tax reform, the rising deficit and mounting trade wars that hold the potential to stifle export growth. Additional comments are that India will continue to lead growth among all major economies as China continues its measured slowdown.
Economic activity in the manufacturing sector expanded in May and the overall economy grew for the 109th consecutive month, according to the nation’s supply executives in the latest Manufacturing ISM Report. Hotel real estate investment stocks were up markedly in Q2 of 2018 and hotel brand forecasts are up. While the biggest merger today is the LaSalle-Pebblebrook deal, we see more mergers and acquisitions coming that might include a large brand merger.
The return of business travel has been impacted by recent tax cuts and 2018 is rock solid. STR, parent company of Hotel News Now, increased their 2018 revenue-per-available-room growth forecast to 2.9% (from 2.7%), driven primarily by average-daily-rate gains and strong transient demand. STR’s 2019 RevPAR growth forecast remains at 2.4%
International markets, originally thought to be declining due to U.S. President Donald Trump, are actually picking up steam. A new Tourism Economics report is showing that the data from the past few years has been inaccurate and that international travel has actually been increasing rather than decreasing. According to Tourism Economics, overseas travel to the U.S. increased 3.9% in 2017. Furthermore, the dollar is sitting very close to equilibrium and is no longer a deterrent to travel. While Chinese investment is way down, Chinese travelers and others continue to visit the U.S.
What does all of this mean to hotel owners and investors? Values have peaked, RevPAR growth has peaked, but all is stable for a while longer. Sell if you are looking to avoid working through a correction in the market, and buy below the peak if you are in for the long haul because interest rates are relatively low and money is available. Hold if you are able to benefit from low-leverage, low-interest rate loans. There is no reason to believe we are going to crash and burn like in late 2008. 2018 will still be great!
Robert A. Rauch, CHA is an internationally-recognized hotelier, Hotel Guru, CEO and founder of RAR Hospitality, a leading hospitality management and consulting firm based in San Diego. Rauch has over 35 years of hospitality-related management experience in all facets of the industry.
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