Economic forecasts are notoriously tricky. There is a good reason why there are endless variations of the old joke that “economists have predicted nine out of the last five recessions” floating around out there. However, despite all the uncertainty (and despite the humor), forecasting of market, industry and economic conditions plays an important role in a number of industries.
And the hotel industry is no exception. While every hotelier understands the need to remain flexible and responsive to changing conditions, quality analysis of what will happen in the weeks, months and years ahead can influence everything from short-term decision making to long-term strategy. When those predictions become less accurate and forecasts become less consistent, that can create some uncertainty. It also can provide some important insights into the state of the marketplace, and can help hotel owners and operators (re)focus on the essential metrics that drive their business.
Inconsistent hotel forecasts
Today, we are seeing that phenomenon in action. The best and brightest minds in the industry are having trouble generating accurate mid-to-long-range forecasts with any real degree of consistency. The extent of this newfound uncertainty is reflected in the wide range of revenue-per-available-room predictions for 2012. Just a few years ago, it was not unusual to see a cluster of similar yearly forecasts with little more than a half-point spread between all the major analysts. Today, however, that half-point variance has broadened considerably: 2012 RevPAR predictions have ranged anywhere from 4% up to 6.5%, a relatively dramatic change in just a few short years.
To be clear, it’s not that the leading industry analysts have become any less skilled at what they do. The companies and institutions considered as the most reliable forecasters (names including STR, Horwath HTL, PKF Hospitality Research and HVS) are still applying their experience and expertise and doing some fine work. But it’s telling that different forecasts, which used to be fairly consistent with each other, are now more divergent, and it is undeniable that the accuracy of the predictions from even the most knowledgeable sources in the industry has dropped off. Of course, any predictive modeling or industry forecasting has some inherent uncertainties baked into the process. It is important to remember that forecasting is not foretelling. As hotel owners and operators, it is our responsibility to recognize this trend, to understand what factors are causing this uncertainty and to use those insights to further our knowledge about the forces at work in our own markets.
A dramatic recession
Fundamentally, the relative uncertainty in industry/market forecasting is a byproduct of the recession. The nature of this recession, in particular, with its dramatic swings and historically unusual circumstances, contributed to a level of economic instability and marketplace unpredictability that we haven’t seen in decades. At the operational level, those big picture variables are complicated by trickle-down subtleties that can cascade into the day-to-day operations of a hotel. For example, the shift in demand has allowed consumers to make their travel plans much later than normal, creating a smaller booking window that makes forecasts even less accurate and allows less operational and pricing flexibility. Another problem comes from trying to apply industry-wide predictions to so many disparate markets, many of which are recovering at very different paces. Especially in the hospitality landscape of today, where things are more market specific than ever before, such a broad characterization is unlikely to be as meaningful from one market to the next. It is a sign of how shaky things have been that it can seem at times as if the most reliable forecasting has been the old fashioned “go with the gut” strategy.
While quality market forecasting integrates the very best data and uses that data to make informed predictions about what lies ahead—what if that data is flawed or incomplete? Issues such as fluctuating gas prices, international crises and other big picture economic issues can have a profound impact on the industry. We saw that phenomenon at work in last November’s credit downgrade, an event that led to November bookings drying up, only to see a strong December recovery.
Refocusing market strategy
With all the noise, these new predictive uncertainties have given owners and operators the opportunity to refocus on market specific context and details and remind us that not all metrics are created equal. RevPAR is the bellwether, as always, regardless of the mix between rates and occupancy. The second most important is rates, which have been the wildcard during this recessionary period. Rates are a key player, particularly today, when we have commoditized the hotel industry. Occupancy also is important as a reflection of demand, but rates are a great predictor of how we are pricing our commodity. The relationship between these numbers is as important—if not more important—than the numbers themselves. Even when occupancy and demand have been strong in recent years, when rates were still off, the overall state of the market has been fairly sluggish.
So when will things be back to normal? While we are seeing some promising economic indicators and overall demand is improving, the journey will be a long one. Considering that we began this recovery 20 feet underwater, being 10 feet closer to the surface is preferable, but even then, the air is not a whole lot better there. The likelihood that the aftermath of this recession will leave a fundamentally altered economic landscape means that we might not ever get back to where we were—there will instead be a “new normal.” However, that the industry will continue to evolve and adapt to meet the challenges posed by that new normal is one prediction I am 100% confident will come true.
First Hospitality Group Inc. has been involved in the development, ownership, and management of hotels since 1985. Currently, the First Hospitality Group, Inc. portfolio of over 52 hotels consists primarily of Hilton and Marriott affiliated assets. In addition, First Hospitality Group, Inc. has ownership interests and manages hotels affiliated with InterContinental, Hyatt, and Carlson. For further information, visit www.fhginc.com.
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