Industry outlook: A crash or soft landing?
 
Industry outlook: A crash or soft landing?
05 FEBRUARY 2016 8:27 AM

Hoteliers, analysts and investors aren’t quite sure what to expect of the hotel industry’s performance in 2016 and beyond. But what could previous declines tell us about what to expect when the industry does finally trend downward?

There is a disconnect out there in the hospitality industry, one that is borne out of timing. 
 
The industry is very likely at or near this cycle's peak, which makes many people very, very scared. So while the fundamentals of the industry are—for the most part—the best of our lifetimes, Wall Street analysts are skittish and pointing out the looming bear economy headed our way.
 
So what's the issue?
 
There are a lot of sub-issues at play, but overall, the main issue is no one knows what happens next, and that freaks people out. When the hotel economy was in its recovery phase, it was (relatively) easy to forecast continued short-term growth as long as the primary influencers on hotel demand were behaving. But after months and months of continued record-breaking performance in the industry, many people question how long this pace can be sustained. 
 
It makes me think of launching model rockets with my kids. At the apex of the rocket's trajectory, I'd helplessly stare up and hope the chute would deploy. Most of the time it did, and the rocket floated gently back to the earth. Once in a while it didn't, and the rocket smashed into tiny bits on the ground.
 
In 2009, the chute didn't deploy for the hotel industry. Nor did it in 2001.
 
A Wall Street banker asked me the other day, "has the hotel industry ever not crashed?" Meaning, has there even been a mild correction to growth--a gentle float back to the earth--before a new period of expansion? Consider this very basic chart:
 
 
The dips in 2001 and 2009 are apparent, where revenue per available room declined 11.3% and 19.6% from the previous peaks, respectively. If you define a 10% drop in RevPAR as a crash for the hotel industry, these periods both qualify. The crash of 2001 saw 21 months of consecutive RevPAR declines, and the 2009 crash (which technically started at the end of 2008), saw 22 straight months of decreases.
 
Prior to that, the only running 12-month decline in RevPAR was a 14-month period spanning March 1991 through April 1992. Remember then? The junk bond market flamed out, Michael Milken was newly in jail and the Resolution Trust Corporation was liquidating the assets of all those failed savings and loan associations, many of which held hotels on their balance sheets. 
 
The U.S. economy was in the tank, but the hotel economy, at least its topline performance, didn't crash. In fact, from the previous peak to the trough of that particular downturn, RevPAR lost exactly one dollar. That one dollar represented a total drop of 2.7%, a far cry from the declines in 2001 and 2009. Some would call this more of a controlled landing. In other words, the chute deployed.
 
So what's waiting for us in the next few years? Here are seven reasons hotel analysts are afraid, along with my take on what’s happening:
 
1. The growth of growth is declining
Yes, that's right. RevPAR is growing, it's just not growing as fast as it once was. 
 
My take: Don't freak out over this. Growth slows, and it's part of a natural cycle. The industry is at record levels and, in many markets, occupancies are nearly maxed, so it's unrealistic to assume growth in perpetuity at greater than 5% levels will continue. A slowdown in growth doesn't portend a crash.
 
2. We don't need more hotels
New hotel construction is ramping up, and we expect to see it reach a 1.7% increase in 2016. 
 
My take: Don't worry about this, unless you're in a few select markets. New supply is always a concern to a certain degree, but we are still at levels well below the expansion periods of the late ‘90s and 2000s. That being said, if you operate in a declining market (like Houston), new hotel openings can compound the pain.
 
3. Airbnb will steal all hotel demand
Basically, analysts view Airbnb as the Samsung of the hotel industry, coming in and stealing a huge chunk of Apple's iPhone market share. 
 
My take: Don't freak out about this ... yet. There is little to no evidence of this happening. Yes, Airbnb and similar companies only continue to grow larger (and the rental owners will likely become more and more savvy in the ways of revenue management) and a wise hotel operator would be well-served to study the influx of alternative accommodations in their markets, but the conceit that every room booked by Airbnb is a room lost by hotels is false. In my opinion, while there is undoubtedly some overlap and competition between Airbnb and hotels, Airbnb is actually growing the market for travel in many cities.
 
4. Rate growth isn't what it should be
If we are at record occupancies, why are we only seeing double-digit rate growth in a select few markets? 
 
My take: It’s hard to argue this. I've been surprised by somewhat soft rate growth for some time. Nearly every market is at its all-time peak occupancy (or was at some point in 2015), but 2015 rate growth was a moderate 4.4%. That was slightly down from 2014's 4.5% rate growth, which has so far been the highest in this expansion cycle. It's unlikely we'll see rate growth higher than these levels in this cycle. What’s even more concerning is transient rate growth recently slipped to 3.7% (over a 12-month stretch through December 2015), its lowest level in six years.
 
5. Junk bonds are back, and they're about to crash
High-yield corporate bonds are starting to fail, and analysts believe that's a sign of the Apocalypse. 
 
My take: You could probably freak out a little over this. Here's the thing: Interest rates have been nothing or next to nothing for years. So investors looking even for the slightest returns have turned to corporate high-yield bonds, which have been increasingly loaded with energy and gas companies, and the junk bond market has swelled. All is good when oil is $100 a barrel, but at $30 a barrel, these bonds begin to strain. 
 
In December 2015, a junk bond mutual fund overseen by Third Avenue Management collapsed and investors were prohibited from taking their money out—kind of a big deal. According to The Economist, the proportion of junk bonds deemed “distressed”—defined as having a yield 10 points higher than Treasury bonds—“is 29.6%, up from 13.5% a year ago. That is the highest ratio since 2009, according to S&P.” The concern is there will be a multitude of junk bond collapses, spooking the larger economy, which would, in turn, negatively affect the hotel industry.
 
6. China, China, China 
The Shanghai Composite Index market is taking a beating in 2016, sparking fears that the rapid slowdown of the world's second-largest economy will drag the entire global economy into recession.
 
My take: Yes, this is a cause for concern, because not only does a weak U.S. economy hurt U.S. hotels, but so does a weak Chinese economy. The relatively new U.S.-Sino 10-year visa policy has generated a large increase in the number of Chinese travelers to U.S., the pace of which will be affected by a slowdown in growth to China's economy.
 
7. The push toward a bear market
Falling oil prices, imploding junk bonds and a crashing China will bring us into a bear market. 
 
My take: This is where being able to see the future would really come in handy. Yes, any of these events—or a combination of all three—could happen, and there's no question that a bear market, and certainly a recession, hits the hotel industry hard. Travel spending is volatile: leisure travelers will freeze spending on vacation much faster than other expenses, and corporations can be quick to curtail business travel, or push desperate hoteliers hard for cheaper and cheaper rates. Hotels are highly susceptible to consumer confidence, and any erosion of demand is going to make it especially hard to weather any new supply or the proliferation of alternative accommodations.
 
So should you freak out overall?
 
No. Let's not talk ourselves into a crash here. The fundamentals of the hotel industry are solid; we are expecting another record year in 2016. But that doesn't mean the hotel industry won't soften, because that's already happening. A natural easing of growth is underway, and absent a significant downturn in the broader economy, what the hotel industry should experience over the next few years is a soft landing, perhaps similar to what we saw 25 years ago. 
 
What is the difference now compared to 2001 and 2009 when the chute did not deploy? In 2001, the industry was healthy and growing before we experienced the catastrophic events of 9/11. Then in late 2008, the collapse of Lehman Brothers—at a time when the industry was starting to slow—and the subsequent near-collapse of the global banking sector accelerated and intensified the downturn. If not for these two events, I believe the eventual downturns would have been significantly different and milder. 
 
The opinions expressed in this column do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Columnists 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. 
 

7 Comments

  • Revenue Manager February 5, 2016 4:19 AM

    The great paradox of why haven't rates climbed as occupancies have continue to grow is partially the result of the yield management software that all of the major chains now have in place. Their goal, stated or not, is to drive RevPAR, even at the expense of rate. Since the brands make the money on the franchise fees that are derived as a percentage of top line revenue, they are far less concerned with the bottom line profitability of the franchisee or hotel operator.

  • Joan Eisenstodt February 5, 2016 4:27 AM

    Interesting. Meeting planners are still concerned that it's a strong sellers' market. Maybe not? Or not quite?

  • Daniel Lesser February 5, 2016 4:57 AM

    CONGRATS Carter. You obviously have a terrific pulse on the market.

  • Joel Ross February 5, 2016 5:13 AM

    Carter sounds like he was trained by Hilary explaining how all those top secret emails on her server are not really top secret- they only appear to be so by the CIA and Pentagon but not her. There is a reason the stock market is in bear territory if you eliminate the favorite 8, and there is a reason the jobs report today was so much weaker. The IMF did not cut world economic growth forecasts because things are really fine, and Japan did not go to negative rates because their economy was doing well. Just like Hilary, Carter wants to blame Wall St as being out of touch for the realistic view they have. Well, it is the worldwide investors, not Wall St that have driven down hotel REIT and stock prices because the investing world which looks at the wider world, believes hotels are in for a much more negative year than people in the industry who have an agenda to see only rosy glow. It would be much more accurate if Carter would use inflation adjusted numbers, and NOI not revpar. Investors put NOI in their pocket not Revpar

  • Carter February 5, 2016 8:12 AM

    Read the article carefully, Joel. I never said Wall St. was out of touch, nor did I say Wall St. was wrong. I was saying there's a disconnect between what we are seeing right now and what analysts are fearful of, and was giving my insights as to why that disconnect exists. In the article, I highlight several things that I agree are real concerns. But I also believe there exists fear-mongering in the industry, and to a certain extent that fear affects how hotels book and price rooms, which can create a self-fulfilling prophecy as to a downturn. Yes, Joel, I agree there will be a downturn at some point, and I'm certain you already have your "I told you so" article scripted since you have been warning of the next downturn since we were in the midst of the last one.

  • Laurie February 5, 2016 9:34 AM

    Thanks for sharing your insights! It is appreciated.

  • Phil Ribolow February 8, 2016 5:51 AM

    Very good article Carter. The only point I'd like to add onto is that 'we', the hotel industry, can't talk ourselves into a crash. If the world economy crashes for whatever reason, the hotel market will crash right along with it, and nothing 'we' do or say will change that in any way. Keep up the excellent work.

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