Article Summary: How the hotel industry responded to past recessions might indicate how it will respond to the next one. However, some variables—such as higher supply and unknown black swan events—could throw a wrench in the works.
How the hotel industry responded to past recessions might indicate how it will respond to the next one. However, some variables—such as higher supply and unknown black swan events—could throw a wrench in the works.
Primary Category: Research
BROOMFIELD, Colorado—It’s time to remind ourselves of the effect economic recessions have on our industry.
Most economists are predicting the next U.S. recession might come as soon as late 2019 or the following year. The stock market has already shown signs of an economic decline, posting net losses for 2018 and exhibiting major volatility, despite sizable corporate tax breaks. Potential threats that could lead to a recession include a global trade war, elevated levels of corporate debt mixed with rising interest rates, a bursting technology sector bubble, and of course a black swan event always remains a risk.
Our industry feels the pain of recessions more than most. The impact is strong, broad and immediate. For example: Lehman Brothers filed for bankruptcy on 15 September 2008. Revenue-per-available-room growth the previous 12 months was 2.5% nationwide, then September 2008 finished down 3.1%. Eight months later in May 2009, monthly RevPAR declines bottomed out at 20.4%. The 12-month period ending October 2009 revealed a devastating 16.8% RevPAR decline.
In 2001, RevPAR had already declined for five months before the 9/11 attacks. That month, however, RevPAR plummeted 23.2% across the U.S. Nine months later in June 2002, RevPAR bottomed out at 10.2% for the 12-month period.
These two recessions were very different, yet the effects to our industry were very similar in impact. For instance, both of these recessions affected luxury and upper-upscale chain scales the most, while limited-service segments fared better, especially in 2002.
Resort and airport hotels were affected significantly, while interstate and small town hotels fared better. In fact, interstate hotels never posted a 12-month period of RevPAR declines following 9/11, bottoming out at 0.7% growth.
Full-service hotels performed the worst during the past two recessions, particularly luxury. Limited-service hotels performed best, but extended-stay and independents also fared better.
The top 25 U.S. markets were certainly affected much more than the industry overall, declining 19.1% in 2009 and 16.5% in 2002. New York, Chicago, Dallas and Miami were four markets severely hit during both recessions. San Francisco posted the biggest 12-month decline at 32.5% in 2002.
The Great Recession cut deeper than 2001 and was certainly more widespread. The October 2009 16.8% RevPAR decline came in the form of a 7% decline in demand and 7.9% in average daily rate. The June 2002 RevPAR decline of 10.2% came from a 4.3% decline in demand and 4.4% ADR decline.
So what can U.S. hoteliers expect this time around?
Consider that 500,000 hotel rooms have been added since the last recession, increasing supply by more than 10% nationally, and much more than that in a handful of top markets. Moreover, the vast majority of these new rooms have come in two segments: select-service and extended-stay.
Finally, labor costs have begun to outpace revenue growth the past two years. That growth in labor costs this cycle certainly will play a role in revenue declines accelerating through the P&L, reversing the record profits that we’ve experienced of late.
On the other hand, the Great Recession was a rare mix of several major issues in our economy culminating in a perfect storm. The results devastated companies and entire industries.
Not that it won’t happen again, and probably sooner than we think, but the magnitude of the next recession will most likely be less of an impact overall—fingers crossed. As for the impact to the lodging industry, all we can do is look at past recessions and speculate.
Joseph Rael is the Senior Director of Financial Performance of STR’s Consulting & Analytics division.
This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.
Hide Headline: No
Hide Feature Image: Yes
Hide Summary: No
Force Login: No
Third Party Article: No
Headline: A look at past US recessions and their hotel impact
Article Date: 12/19/2018
Article Time: 8:43:00 AM