The factors driving latest US hotel industry forecast
The factors driving latest US hotel industry forecast
29 JUNE 2020 9:34 AM

Analysts from STR and Tourism Economics offer insights into the firms’ updated forecast, which predicts a roughly two-year recovery for the U.S. hotel industry. 

By  Emmy Hise  and  Aran Ryan

BROOMFIELD, Colorado, and PHILADELPHIA—Forecasting U.S. hotel performance is a moving target due to unknown variables such as government regulations and containment measures related to COVID-19.

As the impact from the pandemic continues to evolve, Tourism Economics and STR released an updated total U.S. hotel-industry forecast on 26 June.

The primary drivers are:

  • Economic conditions that correlate hotel performance recovery with GDP and unemployment recovery,
  • Expectations that COVID-19 will remain a defining factor through first-quarter 2021, with particularly negative impacts to international and group demand;
  • A four-stage lodging demand recovery based on gradual relaxation of social distancing measures that is expected to result in strengthening demand;
  • Delayed under-construction properties, and fewer construction starts until the industry improves; and
  • Average-daily-rate declines through Q1 2021 that will then gradually normalize.

Economic conditions (based on Oxford Economics’ June outlook)

Economic recovery depends on successful containment of the COVID-19 outbreak. Recent data shows economic activity has improved; however, a full recovery is expected to take time. It is anticipated that GDP and consumer spending will not regain Q4 2019 levels until Q4 2021, roughly two years after the initial shock.

GDP is forecast to decline 6.1% in 2020, before increasing 6.3% in 2021.

The unemployment rate in May averaged 13.3% and is not anticipated to return below 6% until 2022. This is expected to cause economic-related overhang on travel activity, stemming from the substantial shocks to income, wealth and confidence experienced by business managers and households.
Policymakers have acted decisively to support the economy during the crisis, with more than $3 trillion of fiscal stimulus approved since March.

COVID-19 as a defining factor
COVID-19 is expected to remain a defining factor through Q1 2021. Regional virus outbreaks are anticipated to continue, resulting in gradual and uneven progress restoring confidence. Travel is expected to improve as the economy recovers.

Lodging demand recovery
International visitor demand will continue to be significantly impacted and is expected to take until 2024 to return to 2019 levels.

Group demand will continue to be significantly impacted, particularly large events in major urban markets. Essential meetings and small group events are expected to gradually resume, with differences across regions.

Business-transient demand is expected to be significantly impacted, particularly corporate-transient demand that requires air travel and travel to major urban markets. Business-transient demand resulting from regional trips, trips by small businesses or sole proprietors, and essential trips will continue. Another impact to business travel is expense. Employers may be cutting travel budgets, even if the staff feels safe to travel.

Leisure transient demand is expected to be moderately impacted. Leisure travelers driving to regional destinations outside major urban areas are assumed to account for the bulk of activity. There is some substitution of what would have normally been international travel outside the U.S., with domestic travel.

Four-stage recovery of U.S. travel activity
Stage 1 - Recent performance: Due to restrictions, travel activity was largely suspended during late-March and early-April with room nights in April declining 68.3% below prior-year levels. May and June showed strong initial gains, with the year-over-year decline in May easing to 57.2% and the week ending June 13 declining by 47.6%.

Stage 2 - Summer 2020: A resumption in leisure travel, primarily by road, will support continued improvements in room demand in July and August. This recovery will differ substantially between geographic markets, and overall demand levels are expected to remain well below prior-year levels. For example, July and August demand is expected to remain 35% to 40% below 2019 levels.

Stage 3 - Fourth quarter 2020: The forecast estimates for Q4 2020 include moderate virus-related overhang that would continue to suppress travel activity. Demand for Q4 2020 is forecast to be on average 32.5% below prior-year levels based on the assumptions that:

 COVID-19 will be largely contained, although some regions will continue to experience virus outbreaks resulting in continued restrictions and containment measures;
 small groups are permitted to meet in most markets with modifications, but some risk aversion by participants, organizers and corporate sponsors reduces attendance at such events; and,
 there will be continued reluctance to travel, particularly by air.

Stage 4 - Recovery in 2021 to 2023:
A strong recovery in travel activity is expected to occur during the period from 2021 to 2023 as risks related to COVID-19 are substantially, if not entirely, controlled. As the economy is expected to recover close to, but still slightly below, projections of economic activity preceding COVID-19, so is lodging demand. By Q1 2023, demand is estimated to recover to the level of room nights recorded in the corresponding quarter of 2019, marking a full demand recovery 11 quarters after its trough in Q2 2020.

There are two ways supply is calculated for forecasting purposes. One, total room inventory assumes all properties remain open, except seasonal closures and properties under renovation for greater than six months. Two, STR assumes properties that are temporarily closed for the full month are removed from supply.

Total-room-inventory supply is expected increase 1.4% in 2020, 1.3% in 2021 and 1% in 2022. This gradual deceleration reflects the permanent closure of less than 1% of U.S. rooms in 2020, full-year operation of rooms opened before April 2020, and the gradual opening of a portion of the rooms under construction pre-COVID-19. These gradual openings reflect projects delayed or disrupted by COVID-19 through local restrictions, impacts to supply chains, and project-feasibility reevaluation by developers.

STR standard supply is expected to decrease 4.4% in 2020, increase 5.5% in 2021 and then increase 2.9% in 2022. This reflects the temporary closure of 12% of room inventory, on average, during Q2 2020. Many of these properties are estimated to reopen by the end of Q3 2020. The full-year operation of these properties in 2021, as well as new hotel openings in 2020 and 2021, is expected to result in strong supply growth in 2021.

Total-room-inventory occupancy recovery
Total-room-inventory occupancy is estimated to average 29.5% during Q2 2020, representing the anticipated trough. By Q2 2021, as demand gradually recovers, occupancy is anticipated to recover to 58.2%. By 2023, occupancy is expected to recover to 63.6%, above its 62.5% average between 2005 and 2019.

ADR recovery
The abrupt shift in hotel demand impacted average daily rate, resulting in a 44.4% decline in April 2020 and 39.9% decline in May 2020 relative to the prior year. This decline was partly due to the sharp pullback of demand among the higher-tier chain scales and dramatic segmentation shifts.

The trajectory of ADR recovery is particularly uncertain; the pace of recovery and the extent to which operators engage in discounting will each have a tremendous influence. Historically, recoveries are characterized by a rebound in demand first, followed by a slower recovery in ADR. As an additional consideration, group demand was particularly slow to recover in prior downturns.

Overall, as travel activity begins to gradually normalize, ADR is expected to revert from heavily dislocated pricing, as was experienced in April and May, to levels that are more consistent with competitive pricing in a context of weak demand. ADR within higher-tier chain scales, which tend to be more concentrated in urban locations, will likely experience a longer recovery due to reliance on heavy group and/or international traveler presence. ADR recovery will be slower with 18 out of the top 25 markets achieving higher group rates than transient rates in 2019. Furthermore, although full-service, higher-tier chain scales are reopening, many properties will offer amenities in a reduced capacity, which could place downward pressure on rates.

ADR levels are expected to normalize each passing quarter. While the last three quarters of 2021 are expected to experience double-digit year-over-year growth, the first quarter is expected to still show a decline relative to pre-COVID-19 performance. As a result, annual average ADR growth for 2021 is expected to only show a growth of 5.2%.
These assumptions will be reviewed again when the next hotel industry forecast is released during the Hotel Data Conference in August. 

Footnote for article. General market forecast methodology information can be found on the last page of a downloaded sample report on a market forecast.

Emmy Hise is senior consultant of Consulting & Analytics with STR. Aran Ryan is director of lodging analytics for Tourism Economics.

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.

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