There are signs of both good things and bad to come for the U.S. hotel industry. Here are some trends to keep an eye on.
Now in the 87th month of consecutive revenue-per-available-room growth in the U.S. hotel industry, many might be wondering, “Is the end near?”
There are still nearly 200,000 rooms under construction, occupancy levels have peaked, and average rate growth is declining, albeit only slightly. The booking window continues to narrow; the dollar remains high, affecting gateway markets; earnings before interest, taxes, depreciation and amortization is harder to grow due to increased wage and related expenses; and Airbnb is reducing peak period compression. Add to that the online travel agency dilemma—in which 15% to 20% of our revenue is eaten up—and outside factors like terrorism and the global economy, and it’s amazing we are doing so well!
We must remember that interest rates are low; the recovery from 2010 to 2016 was not particularly robust; and tax reform and repatriation of funds remains available to us, as does both debt and equity. Outside of an external “event,” we seem to have fairly blue skies ahead this year and next. The 1990s brought us 111 straight months of growth. I do believe that we can approach that again.
Foreign capital, frequently from China, continues to keep values steady if not higher than last year. Mergers and acquisitions are creating savings, but when it comes to individual assets, the time has come to really optimize asset value in preparation for a change in the economy down the road.
STR has identified a tipping point where negative RevPAR growth in a certain number of U.S. submarkets indicates a turn in national RevPAR performance. Naturally, there are cities where it is clear that external events produced negative RevPAR growth. Those of us in Southern California know that Los Angeles received massive demand last year from the Porter Ranch gas leak. This has impacted year-over-year performance in 2017.
New York has been hit with extremely high, double-digit supply growth, and San Francisco has a closed Moscone Center. Double-digit supply growth will also impact Denver, Seattle and Nashville, but forecasts for 2017 and 2018 call for flat occupancy levels and average rates at or above inflation.
Proactive monitoring of hotel assets must include a tightening of internal controls, a review of revenue management strategies to enhance top-line performance, managing labor costs without sacrificing service levels, planning the most effective capital expenditures and keeping your brand committed to you. This portends a tipping point in the area of wages vs. robotics.
The introduction of robotics will go mainstream quickly now. Fairfield Inn & Suites San Diego North/San Marcos added a service robot in San Marcos, California, and others will soon add housekeeping robots to vacuum, thereby reducing room cleaning time and helping to reduce the nagging back injuries to our team members. Wage growth is off the charts in California thanks to legislation mandating minimum wage increases of nearly 90% (from $8 to $15) over a seven-year period—a compound annual average increase of nearly 13%. Similar increases have occurred in many major markets.
Airbnb will likely become an OTA because it will tire of fighting cities and will see an opportunity to raise commissions markedly. This will help us mitigate the lack of compression nights we get from large events like the Super Bowl, large conventions and special events. The bottom line is that there is a clear tipping point that we are reaching from Airbnb vs. OTAs vs. hotels, where hotels are fighting to increase direct bookings and OTAs continue to promote and advertise aggressively.
Further, the supply/demand ratio is at a tipping point where supply is beginning to outpace demand and millennials/boomers ratio is also at a tipping point where millennials will begin outpacing boomers in hotel demand. Those tipping points mean change, not necessarily decline.
Enjoy the summer ride, it will be fun!
Robert Rauch is an internationally-recognized hotelier, CEO, and founder of RAR Hospitality, a leading hotel management and consulting firm based in San Diego, California. RAR Hospitality’s hotel collection includes independent, boutique and branded properties throughout North America.
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