2025 performance depends on economy, pricing power
 
2025 performance depends on economy, pricing power
13 JANUARY 2020 9:44 AM

Opinions on where the hotel industry will be a year from now vary greatly, but experts generally agree the hotel industry will be looking at brighter days by 2025.

GLOBAL REPORT—The hotel industry will be in an entirely new cycle in five years’ time, but exactly what that will look like varies depending on your broad economic expectations and whether you believe the industry will be able to recapture some of its lost pricing power.

Carter Wilson, SVP of consulting and analytics for Hotel News Now’s parent company STR, said an optimistic read of the hotel industry in 2025 means hoteliers will be able to better leverage data and “will have found a way to sustain pricing power in the face of strong demand, something that has been elusive the latter half of this decade.”

“Some of this change could come from further consolidation among the top industry players, which will undoubtedly continue,” he said. “But I think the continued and increased use of data analytics down to the property level will help operators identify very specific opportunities for revenue growth.”

Wilson admitted that predicting the hotel industry five years out is exceedingly difficult, especially compared to other commercial real estate classes, because of how quickly performance can shift both positively and negatively. To accurately predict the fate of the hotel industry requires correctly predicting the many volatile factors in the global economy.

By 2025, Wilson expects the hotel industry to be “midway through a new expansion cycle.”

“If the downturn we’re facing is mild and brief—as all evidence suggests it should be, though black-swan events always loom—then by 2025 I would expect (revenue-per-available-room growth to be more moderate than robust,” he said.

Wilson noted the industry’s fate is tied to: government fiscal policy, inflation levels, unemployment rates and consumer confidence, all of which can change quickly.

Mark Woodworth, senior managing director and head of lodging research for CBRE Hotels Americas, agreed that future performance should be tied to a return in pricing power for hoteliers, projecting annual average-daily-rate growth to return to an average of 3% per year with slightly increasing occupancies. CBRE projects supply growth to hover around 1.6% and growth in sharing-economy rooms to outpace hotel rooms.

While Woodworth said he’s optimistic about a return to pricing power, hoteliers should be patient because the industry is now embarking on a “mini” cycle and they don’t expect significant rate increases for a few years.

“ADR pricing power will begin to return in 2023 as a new record-high occupancy level is realized,” he said. “Greater pricing power will surface in 2024 and 2025. Thus, 2025 will see the initial stages of another, even stronger, cycle.”

He noted predicting the broader economy can be exceedingly difficult without knowing the ultimate result of the 2020 U.S. elections.

“The leading candidates for each national party clearly have very different policy expectations that carry potentially very meaningful implications for longer-term economic growth,” he said, noting projecting for 2025 actually encompasses trying to guess at two separate U.S. presidential elections.

In terms of industry mergers-and-acquisitions activity, Woodworth expects it to continue out of necessity.

“The domestic lodging industry is very mature in nature,” he said. “As such, to grow profits, product and service providers to the industry will continue to pursue a merger strategy. The big will get bigger.”

Woodworth believes that by 2025, the industry will be more heavily weighted to focused-service hotels.

At the same time, the industry could be fragmented in a different way, said Scott Berman, principal and industry leader for the hospitality and leisure group at PwC. In other words, the industry will continue to grow new and different brands, even as many created over the previous decade still struggle to find new footing.

By 2025, he believes the success of hotel brands will be even more driven by “relaxation, fun and family experiences," and expects to see continued growth in all-inclusive resorts.

Berman also expects the overall approach to branding to shift, causing a blurring of lines between the hotel industry and others.

“Hotel brand extension may captivate the M&A market,” he said. “... All sorts of fanatical pairings inspiring cruise, retail, residential and consumer product brands will sprout up by 2025 knowing that the Gen Z movement will be five years older. The hospitality blueprint, where consumer products blends with entertainment, driving licensing fees will be a norm by 2025.”*

He added hospitality will expand to include hotels blended with retail products, which will fuel the fee revenue available to brands and owners.

A global outlook
Stephen Rushmore, Jr., president and CEO of HVS, said it’s difficult to accurately describe the state of the global hotel industry today let alone five years out because of the many different economies and forces in different countries and regions.

But one broad takeaway that investors can expect is that global hotel performance will lag behind that of the U.S., which he continues to believe is the best place for a hotel investor to be.

“Even though the U.S. might have ups and downs and challenges, over the next 10-year period, from a risk-reward perspective, it’s the best place to put a hotel,” he said.

One of the few countries Rushmore said would be on a similar long-term growth trajectory is Singapore.

“It’s a very well-run country that’s stable and has been attracting a lot of tourism demand,” he said. “They have a good master plan for the future that they’ve been consistently able to execute on.”

Within five years, the hotel industry will be on a very similar path to the one it’s on today, and Rushmore only expects growth in the industry to keep pace with inflation. At the same time, he expects the overall investment in hotels to grow as more and more commercial real estate investors seek the high yields of hotels. With a heavy influx of new investors to the industry but with a history of CRE experience, Rushmore said it could change industry behaviors somewhat.

“More and more people will make the lateral transition to hotels,” he said. “There will be more appetite (for less risky hotels) and a willingness to accept lower yields.”

Rushmore agreed there is no sign of stopping M&A across the industry, but he is worried an overly top-heavy industry will be a stagnate one.

“A lot of the innovation in the hotel industry, which there isn’t a lot of, will come from the smaller companies,” he said.

Feelings from operators
Sloan Dean III, president and CEO of Remington Hotels, expects changes for the hotel industry by 2025 to be heavily affected by companies outside the industry, with supply growth continuing in short-term lodging and an ever-changing distribution landscape.

That could be more of a disruption for the online travel agencies than hoteliers, though.

“Google will continue to be a large disruptor in distribution, and Expedia and Booking Group will have big issues with Google,” he said, noting he simultaneously expects a growth in the use of artificial intelligence and machine learning in the hotel industry.

By 2025, Dean expects the hotel industry to be “in the middle of a robust expansion following a shallow recession.”

David Duncan, president of First Hospitality, described his expectations for hotels in 2025 as “fantastic.”

“We’ve barely scratched the surface of experiential travel, and this will evolve dramatically over the next five years with travel spend becoming an even bigger wallet share,” he said. “We’ll also see a greater emphasis on enhancing the visitor’s experience through the design and amenities offered in guestrooms, restaurant, bar and other communal spaces with a blending of work-play areas.”

He similarly expects to be in the middle of a strong growth period and that Google will have “a much bigger share of the distribution business.”

One thing that does give him concern, though, is rising costs of hotel ownership.

“Five years of accelerating IT CapEx requirements, rising labor costs and consolidated OTAs will have pushed ownership margins down,” he said. “Hotel owners will increasingly turn to savvy, proven hotel management companies in the search for greater efficiencies.”

*Clarification, 21 January 2020: The original version of this story included a quote that has since been removed at the discretion of the editors.

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