Freitag’s forecast: 10 predictions for 2015
18 DECEMBER 2014 9:07 AM
2014 was a good year for the U.S. hotel industry. 2015 will keep the ball rolling with the focus on: more.
As an amazing 2014 comes to a close, the operators in the United States hotel industry expect (and have budgeted for) an equally good 2015. And I agree.
We at STR will report on strong data for the foreseeable future. (STR is the parent company of Hotel News Now.) True, the tough comparables will make the percent changes a bit more muted, but overall performance should be solid with new records everywhere.
Here is my list of 10 topics we will see more of in 2015:
1. More ADR growth
With occupancies hitting an all-time high (at least since STR started in 1985), market forces are clearly on the side of operators, and price increases are expected. For the past three years, average daily rate increased well above the level of inflation at around 4%-plus. Specifically, U.S. room rates increased (figures year-to-date October):
- 2012: +4.2%;
- 2013: +4.1%; and
- 2014: +4.6%.
It is not a stretch to expect that ADR will continue to grow even stronger. STR projects a 5% increase for 2015.
2. More occupancy growth
As room demand increases and limited new supply is added, the absolute level of occupancy is expected to reach 64.4% in 2014 and 65.1% in 2015—a new record. The growth rates are slowing as the many hotels are filled to capacity.
That said, it is amazing that growth is still possible. STR projects occupancy in 2015 to increase an additional 1.1%
3. More group demand
The single most important chart I preset in my talks throughout the year is the group demand curve:
Clearly, group demand is back in full force. The positive implications are that revenue managers have much better visibility into 2015 and beyond about their base occupancy. That should allow them to yield up group as well as transient rates.
4. More high-profile sales
I admit that I was a bit surprised that the Waldorf Astoria New York hotel was on the market. With the change in hands there is—however small and in however distant a future—a possibility that the flagship of the Hilton Worldwide Holdings could one day not be part of a Hilton brand and lose its name.
True, the chances are slim, but they are higher now than they were when the hotel was owned outright by Hilton and Blackstone. So, I assume that means that there are no more “sacred cows,” and other high-profile flagship assets are on the block, officially or not. And as Chinese banks and insurance companies look to diversify their portfolios and participate in the real estate upside of the U.S., more sales of this type will happen in 2015.
5. More limited-service supply
Even though the total supply growth in the U.S. was well less than 1% in 2014, limited-service hotels continue to sprout all over the place. Of the 65,000 rooms opened in the past 12 months, 42,000 were in the upscale and upper-midscale segments. Of the 113,000 rooms under construction, 68% are in those two scales. This is where the action is.
The question this supply increase poses is twofold:
- Will the influx of new rooms decrease occupancy in their respective submarket and comp set and will that have negative pricing implications on the submarket?; or
- Will the new rooms come out of the gate as rate leaders and therefore allow other properties to keep pricing integrity intact.
2015 will tell.
6. More construction delays
Yes, there are only 113,000 rooms under construction, but other sectors are booming. Multifamily housing is strong. Demand for office space is increasing. And imagine an uptick in single-family-home construction as the economy improves. And next thing you know there is no timber, concrete or steel to be had. The construction cost indices by the Engineering News Record seem to point to prolonged increases in costs. Add to that quite a few construction crews did not survive the recession.
Anecdotally, I am hearing about a shortage of skilled labor, especially in states with tough immigration enforcement camps. So, what you have then is a potential for prolonged construction times for hotels. Developers beware!
7. More brands
Let’s play a game: Canopy, Vib, Hualuxe, Hotel RL, Red, Venu, Pendry, Belmond. Quick: Name the parent.
You are in this industry. You should know!
And those are just the brand launches that I remember. I am probably missing some brands in Europe or Asia. The industry is doing ever better, so expect more brands to be conceived, launched, designed in 2015—and why not? As the parent companies already have the back-of-house systems and (presumably) guest goodwill, extending their reach and offering different price points makes sense.
The question is: How much is enough? And how much is too much? Is there a natural saturation point when guests become confused, and too many brands just have two or three hotels? Maybe. But I doubt the brand proliferation will end in 2015.
8. More occupancy tax
Demand for rooms will increase, and local municipalities will benefit from higher occupancy taxes. But I am not talking about hotels paying more, I am talking about sharing-economy companies such as Airbnb stepping up and acting as good corporate (and local) citizens.
Airbnb has been collecting taxes since late this year in San Francisco and in and around Portland. More cities are following suit, setting rules and guidelines to let rental-by-owner operators host guests in their second bedrooms while collecting taxes and getting a handle on operators and their actions. Clearly destination marketing organizations are rejoicing over the newfound revenue stream (assuming we are not just witnessing a shift in demand from existing hotel rooms to alternative accommodations). And more money in the hands of the people who market the destination should help everyone.
9. More discussions about OTA fees
When it was reported that Amazon was making good on its lingering promise to enter the hotel space, one main selling point was its “reduced” commission structure of 15%.
Now, the devil is of course in the details, and just like with other online travel agencies, listing your property on a preferred spot on Page One will come with additional costs or simply a much-discounted rate. More than half of the hotel asset manager members of the Hospitality Asset Managers Association mentioned that third-party commissions were most concerning issue in 2015.
In my travels I am often asked about the idea of a “net rate” that would clearly allow to identify third-party commissions. The problem is that a lot of operators are not quite sure how to track this on a consistent basis. So, the discussion is ongoing, and 2015 will see more arguments and hopefully more data and insights into this topic.
10. More third parties
Well, I mentioned Amazon, so I have to mention Alitrip. The first time most of us heard about Alibaba was when the company went public in September and raised some $25 billion, making it the largest initial public offering ever.
Certainly a company with this market presence will move into the travel and hotel space with force, and it seems the revamped Alitrip site is only the first salvo in that direction. There are probably other Chinese players ready to emulate the best and brightest American travel firms and find a way to tap into the rising appetite for domestic and interregional (and some international) travel. 2015 will likely see more activity on this front; the margins (see point above) are just too good.
So, dear reader, this is my list of “more.” What am I missing? What do you think we will see more of in 2015?
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