US forecast: Cloudy with a chance of flat occupancy
 
US forecast: Cloudy with a chance of flat occupancy
01 JULY 2016 8:14 AM

Occupancy is expected to flatline or even drop as supply finally catches demand, but increasing room rates could drive slow but steady revenue growth in the U.S. hotel industry for 2017.

REPORT FROM THE U.S.—Hotel revenue growth has slowed significantly in 2016, and sources said they expect that to continue through 2017 as occupancy flatlines.

But even if performance might not be as positive as it has been, hoteliers shouldn’t start banking on a recession, sources said.

“I don’t think we’re in for a totally systemwide panic like we’re in a recession,” said Paul Breslin, managing director for Horwath HTL. “I don’t think this is that kind of cycle. I think we’re in a downward trend or softening of a strong cycle. The fundamentals are still strong.”

Bobby Bowers, SVP of operations for STR, Hotel News Now’s parent company, said the industry is likely headed for an extended period of slow but steady growth in large part because there were no wild swings following the 2009 recession.

“2009 (revenue per available room) was down 17%, which was far and away the biggest drop we’ve ever tracked,” Bowers said. “And we haven’t really had a huge growth spurt since then. It makes you kind of think that if you had this big decline and you didn’t really have any huge gains in terms of snap back, then we’re probably in for an extended run of growth around 2% to 4%, which is not great but it’s not negative.”

By the numbers
STR is projecting flat occupancy for 2017, which is the result of supply growth (+1.9%) finally catching up to demand growth (also +1.9%) for the first time since the recession in 2009. Both those numbers are also set to surpass their 20-year compound annual growth rates—each at 1.7%—for the first time since 2009.

STR officials expect revenue per available room to grow 3.8% in 2017—once again the lowest total since 2009—driven entirely by a projected 3.8% increase in average daily rate.

Among the chain scales, upper upscale is expected to see the strongest year-over-year 2016 RevPAR growth at 4.3%, followed by luxury at 4.2%, while midscale could see the weakest with a projected 2.9% increase this year compared to last.

Bowers said he is confident in those projections unless something outside of the industry’s control happens to swing the larger economy in the wrong direction, similar to the 9/11 terrorist attacks and the financial crisis of 2009. Otherwise, revenue growth will continue, albeit at a tepid pace.

“There might be some other kind of event (to hurt the economy), but you can’t predict that,” he said.

Jamie Lane, senior economist for CBRE Hotels, said his company is projecting a 0.2% decrease in occupancy for 2017. However, particularly strong ADR growth, which is projected at 4.9%, would push RevPAR growth up to 4.7% for the year based on the company’s estimations.

That 2017 RevPAR growth would surpass what CBRE is projecting for the full year 2016, which is slated to hit 4.2% based on CBRE’s current estimates, but is still well below growth rates seen in each year following the recession.

While supply growth is a big reason that CBRE is projecting shrinking occupancy numbers, Lane said supply concerns won’t be enough to take away the ability to drive rate.

“It’s still very low supply growth for this point of the cycle,” Lane said. “And outside of the top 25 markets we’re not seeing much supply growth.”

Bowers said that while it’s easy to fall prey to just looking at growth rates, it’s important to remember that the industry continues to break records for its performance.

“Occupancy levels are pretty high almost everywhere you look,” he said. “Year-to-date for the first five months, it’s the highest we’ve ever tracked. And the 2015 full year was by far the highest (year) STR’s ever tracked.”

Some top markets struggle
Sources universally said that New York City and Houston are expected to remain sore spots for the industry through the balance of 2016 and 2017, and major markets like Miami and Chicago are expected to lag a bit as well.

Breslin said New York City’s struggles, fueled by a sustained boom in supply, are difficult for some in the industry to swallow.

“It’s hard for us to accept that New York is actually down,” he said. “We’re used to never seeing that number go negative. Even in the toughest times, it seemed to grow.”

Despite that, Breslin said there are still reasons for long-term confidence in that market, which enjoys especially strong demand. He said some of the new supply in that market is intriguing.

“There are a lot of hotels there that are very different and very special,” Breslin said. “That’s exciting. When you see boutique hotels that are very unique investments, that’s a good indication investors are still optimistic that the market will come back.”

Lane said Houston’s supply-demand dynamics will be improving next year as they expect oil prices to “hold steady to slightly increase,” but it will still be a struggle.

“We’re projecting Houston to have 9% supply growth in 2017,” he said. “There will be strong demand growth, but it’s still not enough to meet that supply.”

Bowers said Houston’s growth numbers should bounce back soon, even as absolute numbers still lag.

“What they’ll see before long is really easy comps,” Bowers said. “They’ve been in the tank now for a long time.”

Strong markets
California is expected to remain strong, sources said.

“The top three cities in terms of RevPAR growth are all in California,” Lane said. “Sacramento, Oakland and San Diego should all see strong growth.”

The California hotel market has been particularly strong of late, and recent surveys from Atlas Hospitality Group showed the state enjoyed a transaction pricing and new construction boom in 2015.

Bowers said the greatest strength in 2017 will likely be seen in some secondary and tertiary markets.

“It’s really market-specific,” he said. “Some markets will be just fine. Others will struggle with a combination of outsized supply growth and lower demand growth. But from the 30,000-foot level we see things going steady as she goes.”

Lane said one of the headwinds “major gateway cities and top 20 markets” will face is growing supply from the sharing economy, particularly through Airbnb.

“Studies we’ve done show that, in the markets where it becomes a significant portion of existing supply and revenue generated in the market, it can create downward pressure on the rates traditional hotels are able to achieve,” Lane said. “That could lead to what we’re seeing where more second- and third-tier cities are outperforming first-tier markets.”

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