Freitag’s forecast: 10 predictions for 2016
 
Freitag’s forecast: 10 predictions for 2016
22 DECEMBER 2015 8:32 AM
2015 saw new records for the U.S. hotel industry. What will 2016 bring?
As we head into 2016, it’s time to think about what we can expect with a new year. Last year, I predicted the United States hotel industry would see solid overall performance with new records everywhere. If you keep up with Freitag’s 5 every month, you would know that forecast did not disappoint. (View a list of the past year’s Freitag’s 5 infographics here, sorted by date.)
 
Here’s a rundown of what I believe we can expect to see in the coming year:
 
1. More mergers and full-service portfolios will trade at high dollar-per-room prices
 
All these mergers seem to point at one truth: Bigger is indeed better.
 
The only way to jump-start unit growth in a rapid way is through acquisition—not by building one hotel at a time, but rather through portfolio deals. Brands will still matter in the future, no matter what online-travel-agency consolidation or rental-by-owner threat emerges in 2016. So in order to build room counts I would look toward undercapitalized brands to be on the block or larger real estate portfolios to trade at high multiples. 
 
And who knows, maybe one of those 30 Marriott brands is looking for a new owner as well?
 
2. More executive musical chairs
And speaking of mergers, let’s talk about the fallout for people. As Arne Sorenson stated on MSNBC, the closer you get to HQ, the further away you are from operations, the more your job is on the line. So expect a whole host of senior executives with long, successful track records to brush up their resumes and get new business cards. 
 
Buyers don’t always clean house. Sometimes the acquisition yields better talent and they let their current people go. But in the majority of cases, the takeover target will bleed people, so expect the industry conference cocktail hours to be quite a bit more animated than in the prior years. 
 
Then again, a few folks will just take their golden parachute and fly into the sunset, golf club in hand.  
 
3. Higher interest rates but more development and room supply growth will pick up
Janet Yellen has spoken, and interest rates are rising. Not by much and not unexpectedly, so this probably just means that, yet, debt will be more expensive.
 
A few projects could fall out, but if a 0.25% rise in the Federal Reserve rates can derail your projects it probably was not sound to begin with. Where we stand today, the number of rooms under construction is some 20% higher than it was a year ago and stands at just under 140,000 rooms. All of this then translates into new openings, and we expect those to add up and translate into about 1.5% supply growth in 2016. 
 
4. More limited-service openings
Not all new supply is created equal. Two-thirds of the rooms under construction are in the limited-service sector, meaning that they can be built in about 12 to 18 months. So expect a lot more of these rooms to open in short order. 
 
I have written before that the lack of ballroom and meeting space is concerning to corporate and association meeting planners. But for developers, the quick and easy development cycle of limited-service hotels also can be seen as a risk-mitigation move to avoid getting caught with a hole in the ground in an environment dampened by an external shock to the economy.
 
5. Higher ADR, positive RevPAR growth for 2016
In the unprecedented environment of record-breaking room demand and occupancy, we expect more pricing. 
 
That said, in October we revised our 2016 average-daily-rate forecast down to +4.8%. It’s still a healthy showing, but not as strong as we had anticipated earlier in 2015. The sad reality is that in 2014 and 2015, when the hotel industry was working off fundamentals that were arguably the best in this generation, room-rate growth was healthy but not superb.
 
Now that new supply is increasing, I have a difficult time convincing myself that there is more pricing power to be had than in the past. Hence our “downgrade.” I assume industry participants can live with room-rate growth that basically is twice as high as the rate of inflation. Profits will therefore continue to grow. This then drives up revenue per available room, which we expect to increase 5.7% in 2016.
 
  • What did Freitag forecast last year? Find out here.
 
6. Muted occupancy growth and declines in some markets 
Half of all rooms under construction are located in the top 26 major metro markets. In some of those markets we expect supply growth numbers to top 2%. Meanwhile, demand growth will not keep pace and occupancy will decline for the first time in a long time. 
 
New York City is getting a lot of attention with regard to new supply, and of those 13,000 rooms under construction, some 9,500 have an open date of 2016. In Houston, we count approximately 7,100 rooms to open in 2016, a potential 8.9% jump in inventory. Some of these rooms will not open that year, but the sign is clear. 
 
Outside of the top 25 markets, Austin, Texas, is recording a lot of activity. We count some 2,200 rooms to open in 2016, a potential increase of 6.6%. 
 
7. Airbnb will make more inroads and become more established 
Ten years ago the one-word answer to any hotel question was “China.” Today it seems to be “Airbnb.” Nevermind the fact that there are whole host (pun intended) of companies that offer the same business model, but Airbnb seems to have gone the way of Kleenex to define the category
 
The latest salvo aimed at the loyal corporate hotel guest is the launch of Business Travel Ready listings geared at business travelers and a de facto frequent stay program by allowing travelers to pay with American Express points. These two initiatives will further cement Airbnb as the lodging establishment of choice for younger business travelers and leisure travelers of all ages. 
 
8. Self-check-in will be more prevalent, going from beta to mainstream
There are few lines a business traveler has to stand in; most of them can be bypassed by road warriors (think: getting your boarding pass, your rental car keys, your movie tickets). And then there’s your hotel check-in. 
 
But I truly think that 2016 is the year that the wait in line to get your key will finally end. Rooms can be pre-assigned and finally the technology imbedded in an app lets you to open your hotel room door. Business travelers want it. CIOs are ready for it, and your phone is, too. 
 
9. NYC, Houston, oil markets will continue to struggle
I talked about new supply earlier, but let’s not forget demand and pricing as the other two factors that can influence RevPAR. 
 
In New York City, despite eternal strong demand and high occupancies, hoteliers seem to be unable to increase rates. And that is on a good day. Imagine all the new hotel rooms and rental-by-owner units that are available in 2016, and you can see why I am less than bullish on market performance. 
 
Hotel performance in Houston and other Texas and Oklahoma markets is married to the price of oil, which is expected to be low. Therefore, room demand will be soft as long as OPEC keeps wells open and providers in the U.S. keep drilling, baby, drilling. 
 
10. If things go ‘kaput,’ they will do so with unprecedented velocity
During my occasional meetings with hotel stock investors one thing is clear: They are looking for the downside. But I don’t see it—yet. 
 
I am afraid, though, that if an external shock to the macroeconomic system should hit that the declines in ADR we reported in 2001 and 2008 are just prologue compared to what is to come. In the up cycle, hoteliers always tell me that they learned their lesson from prior mistakes and that they will not follow the downward ADR spiral of death next time. Well, I would hate to be correct, but if things go wrong, they will go wrong quickly and drastically. 
 
The main reason for that is the proliferation of new channels and when demand ebbs, hoteliers (despite assurances given today) will be all too eager to engage and put inventory to those channels. But then how will consumers find those rooms? Only if they appear on Page One of the search results. And how does your room end up on that page? By having (among other things) the cheapest rate. 
 
And if multiple owner and managers act in their own self-interest, rates drop collectively. And so things go kaput.
 
The opinions expressed in this column do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Columnists published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.
 

3 Comments

  • The Voice December 22, 2015 4:54 AM

    Airbnb the lodging establishment of choice? Me thinks not! Watch Millennials start staying at real hotels once they have some jingle in their pockets.

  • Randy Pullen December 22, 2015 4:55 AM

    Happy New Year!

  • BobSonn December 23, 2015 6:13 AM

    2016 Predictions: 1. Full service will totally drop to "out-of-favor" status, as more travelers understand that limited service hotels offer newer & better rooms. 2. Jan Freitag shocks the industry by announcing that new limited service hotels will sell at lower cap rates than full service hotels. 3. HNN editors finally get on the bandwagon to help hotel industry execs fight the growth of troublesome Undisclosed Resort Fees. 4. All Hotel industry execs & staff have a GREAT & PROFITABLE 2016!

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