There’s a lot of good news about the hotel environment, but challenges remain for 2014 and beyond.
2013 was a good year for the United States hotel industry. As this year comes to a close, here are my predictions for next year, categorized by five topics I think industry participants will like and five items that will cause operators and investors some heartburn.
5 things to like in 2014
1. Growing room demand
I said it before; I’ll say it again: The U.S. hotel industry sold more rooms than ever before.
If you heard me present during the last 12 months, you have heard me say this again and again. In 2013 hoteliers are expected to sell a combined 1.2 billion roomnights, a new annual record. In 2014, STR, parent company of Hotel News Now, expects room demand to grow an additional 2% or so. With healthy national gross-domestic-product growth rates and somewhat healthy employment numbers under our belt, U.S. companies will continue to send their folks on the road. In addition, leisure demand will continue to be strong. So, overall, a very positive outlook.
2. More transactions
STR Analytics, HNN’s sister company, is forecasting total transaction volume will top $18 billion this year. This is a strong rebound from 2011 but still well below the $30 billion in 2007. But at every industry event I speak at, the investor outlook is positive. There is a wide variety of investors now ready to get back into hotel real estate (through debt or equity). Appetite for new construction loans is still muted, though, as long as it is somewhat cheaper to buy than to build.
3. Healthy ADR and RevPAR growth
With higher demand and limited new supply comes a point at which occupancies of existing hotels are so high hoteliers feel they have pricing power again. We at STR expect room rates will increase approximately 4.5% in 2014, well above the rate of inflation. This will then push revenue-per-available-room growth to nearly 5.5%. We expect the majority of this increase will then fall to the bottom line, so net operating income should increase as well.
4. More international flights to the U.S.
International airlines have the U.S. cleanly in their sights, and the domestic “legacy” carriers better take note. As others have reported, former regional airlines whose names you might not be familiar with are targeting major hubs on the eastern and western seaboards. And starting in June you can fly nonstop from Boston to Beijing.
Hoteliers will need to be ready for an influx of guests for whom English is a second language (or they might not speak it at all). Hoteliers will need to train their staff, rethink menus and re-design in-room brochures and pamphlets. Oh, and that goes for their websites as well. Now let’s hope the State Department can get the visa process in the visitors’ home countries streamlined to make the visits easy.
5. The future is mobile (actually, the present is mobile)
You are probably reading this on your tablet or phone, just before you book your next plane ticket or hotel stay from the same device.
Data from Google shows you are not unique in that behavior. The good news is that it makes spur-of-the-moment decisions easier. Likewise, dreaming about and then planning for a trip is an around-the-clock activity. Third-party intermediaries are leading the way with technology that makes booking easy and intuitive. But I know the brands are eager to make sure guests choose their app or mobile site first. So innovation will continue, and we are eagerly awaiting the “next big thing” in mobile that shifts the market.
5 things to dislike in 2014
1. Fewer government meetings
As HNN reported earlier this year, the U.S. government will finally allow us to compare government meeting expenditure year over year. In 2014, we are able to look at comparable data for the first time. We are eager to show the results, but also prepared for what the data probably shows: that the number of large government meetings is declining. U.S. Travel Association has been a steady advocate for responsible government travel, and let’s hope their campaign bears fruit in the years to come.
2. Still only 4.5% ADR growth
Yes, average daily rate will grow, but given the high occupancies I am continually underwhelmed by the lack of pricing rigor. The “good old days” of 2011 with an unprecedented supply and demand imbalance are behind us. If those fundamentals were not enough to support annualized ADR growth of more than 5%, then I do not know what is. So we can just settle into an environment of sub-5% ADR growth for the next few years. But I think it was and is an opportunity lost.
3. Airbnb still does not pay occupancy tax
I am as much in favor of a disruptive startup as the next guy, but an exciting and innovative idea should compete on the same playing field as the legacy competitors. Sure, friendly homeowners can rent out their places, but when they are competing head on for room demand they should also pay occupancy taxes. Now, once that is enforced I am all for rental by owners as new competition and a new force in the lodging sector that will push established companies to innovation and more competitive practices. But let’s start with leveling the playing field. I am glad Airbnb CEO Brian Chesky agrees.
4. Sluggish group demand
With the exception of luxury hotels, most properties are having a hard time attracting group demand at the level of the prior peak. Marriott International’s president and CEO, Arne Sorenson, during the third-quarter conference call, was optimistic about group demand coming back for his company. I hope he is right. But our data has been pointing to a very slow recovery in the group market, which will hinder pricing for transient rooms as well.
There, I said it. Even though the industry-wide supply growth rate stands at record lows and is projected to remain well below the long-term average of 1.9%, the story is different when looking at it market by market.
This is a street-corner business, and the nationwide average belies the fact that some markets have seen and will continue to see a strong influx of new rooms that will impact occupancies.
I am interviewed a lot by journalists from all across the U.S., and they often ask if a specific market is “overbuilt.” Obviously, the answer depends on who you talk to. GMs would probably say yes; developers would most likely say no. But I think the markets that are “hot” will see their performance negatively influenced by the rush of developers trying to participate in the upside that the latest trend reports promised.
So, dear reader, these are my top-five lists. What topics are on yours?
The opinions expressed in this blog do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Bloggers published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.