From hotel pricing power to climate change, hoteliers should prepare for the factors that could have a big effect on their business in 2019.
HENDERSONVILLE, Tennessee—As we embark on the new year, here are some topics I think are worth watching in 2019.
1. Hotel rooms are too cheap
The U.S. hotel industry will finish 2018 in the strongest demand and occupancy environment ever recorded. Utilization is at an all-time high. On average, the industry will have sold two out of three rooms for 365 days in a row. It simply does not get any better than this—except of course that STR projects further demand and occupancy increase in 2019, but you get the point. (STR is the parent company of Hotel News Now.)
So, with little free capacity midweek and on weekends, hotel room rates should be growing at a healthy clip. Or at least growing at a rate of around 7% as they did in the mid-1990s and in the recovery after 2001.
Unfortunately we—and others—predict that average daily rate will only increase 2.3% in 2019. Room rate growth has been muted ever since the Great Recession hit. Rolling 12-month U.S. hotel industry ADR in October 2008 was $108. In October 2018, it was around $130. This equates to an increase of around 25%. The consumer price index increased by 16% at the same time. So, yes, our top-line growth outpaced the bottom line growth in 10 years. But between October 2017 and October this year, CPI increased 2.5%, and ADR growth was—wait for it—2.5%. In other words, the increase of profits for this year is basically zero.
That all said, I do not see this changing anytime soon. Despite the demand records we report on every month, hoteliers are just not comfortable taking advantage of the environment. But if not in 2019, then when?
2. Labor cost will cause heartburn
The U.S. Bureau of Labor Statistics data is clear. The national unemployment rate of just around 3% means that many positions will go unfilled. In fact, according to the BLS, there are 961,000 open positions in accommodations and food service as of September 2018.
So, how do you attract talent to these open positions? Well for starters, being on the list of “World’s best workplaces” helps—tip o’ the ole bellhop pillbox to Hilton. But also, paying good wages and salaries. And the competition for labor will mean increases in wages. The BLS data bears that out today.
Through September, wages increased 3.3%. This trend will not change and will likely affect profitability for hotel owners and management companies. One obvious way to increase the labor pool is of course to let more qualified workers into the country. But the immigration reform seems a long way from being solved. So hoteliers will either need to bear the higher costs or call their representative and demand sensible answers to the current immigration questions. Your call in 2019.
3. Travel could be weaponized
I do not know who coined this phrase, but it is apt. When the South Korea government deployed the THAAD missile system with the encouragement of the U.S. government to the North Korean border, the Chinese government’s response was swift. Chinese tour groups stopped coming to South Korea starting around 15 March 2017. Occupancy and RevPAR dropped precipitously.
So, given the current rhetoric, imagine a scenario where more tariffs are put on Chinese goods and the Chinese authority is looking for a way to retaliate. In 2017, around 3 million travelers from China entered the U.S. Now imagine this number being cut by half, or as high as 75%. Markets such as San Francisco, Los Angeles, Las Vegas and New York City would likely feel the impact. I hope this won’t happen in 2019, but stay tuned.
4. The future is branded
As Airbnb came to prominence over the last five years, one early interpretation of its success was that travelers were looking for unique experiences, away from the “beige box” of 30-year-old guestrooms that all looked and felt the same. At the same time, it seemed that RevPAR growth was accelerating faster for independent hotels. Together, this bred the impression that brands were on the downswing, Marriott’s acquisition of Starwood notwithstanding.
Well, it turns out that the RevPAR acceleration of independent hotels can easily be explained because their occupancy was much lower than that of branded hotels. In other words, for branded hotels almost all RevPAR growth came from ADR growth since their hotels were already pretty full, whereas independent still had room to grow both occupancy and ADR.
The alternative-accommodations space has also been shaken up by the hotel industry players entering the segment, like Marriott’s Tribute Portfolio Homes. But I think more importantly, the design community has taken a page from the Airbnb playbook and is making hotel stays much more communal and interactive through design choices.
So, the disruption is not so much taking place by substituting alternate accommodations for hotels but by hotel adopting the look and feel of a smaller, more nimble, more alternative offering. Plus brands still provide a loyalty point system that travelers so, so love. In 2019, more brands will make themselves even more attractive to guests, which will make them ever more attractive to developers.
5. Climate change will drive demand
The Accumulated Cyclone Energy (ACE) generated by hurricanes in 2017 was defined as “hyperactive” and in 2018 it was “above normal.” How do we see this manifest?
In September 2017, Houston demand increased 47.5%, caused by displaced people and the aid crews of FEMA and contractors. It follows that in 2018, the U.S. RevPAR change in September was negative for the first time in 102 years since Houston’s 36.2% RevPAR drop dragged down the total U.S. numbers by 70 basis points.
Going forward, the impact of climate change will make hurricanes more severe and more frequent, and the impact on our industry will be quite drastic as well. What this means for analysts is that the data we publish is a bit harder to parse since a “good” performance month maybe caused by a natural disaster with a corresponding demand increase. The same maybe true for a “bad” performance month; it could just be the comparable data in the prior year was uncharacteristically high.
More importantly, hotels on the Atlantic and Gulf coast need to brace for impact and realize that an impact from wind or water is not a question of if but when. And 2019 is a good year to prepare for that.
Jan Freitag is the SVP of lodging insights at STR.
This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.