US hotel industry is heading into the ‘Great Unknown’
US hotel industry is heading into the ‘Great Unknown’
03 SEPTEMBER 2019 7:36 AM

As warning signs point to a possible downturn in the near future, hotel data analysts address some of the concerns hoteliers have about what lies ahead.

NASHVILLE, Tennessee—To say there’s uncertainty about what lies ahead for the U.S. hotel industry is a bit of an understatement.

During the “2020: Entering the ‘Great Unknown’” session at the 2019 Hotel Data ConferenceSTR SVP of Lodging Insights Jan Freitag and Isaac Collazo, VP of competitive intelligence at Intercontinental Hotels Group, explained the current factors affecting the industry and the many different ways the future could play out. (STR is the parent company of HNN.)

Looking ahead, the expectation is that gross domestic product growth will slow even further, Collazo said.

“Everyone is agreeable there will be less growth in 2020 than in 2019,” he said. “We are going into a slower-growth period.”

The Economic Policy Uncertainty Index, created after the last big recession, shows uncertainty has started to ramp up, he said. It will only get worse in 2020 because the biggest concern is over who will be president, he said.

The industry also has what could be a called “a supply bubble,” he said. Hotel supply is almost at its peak now, and the last time it was at its peak was 2012, he said. By the end of the second quarter, the industry had more than 202,000 guestrooms under construction, most of them in the upscale and upper-midscale segments.

Supply and demand will pass the equilibrium point because while demand is still growing, supply is growing faster, Collazo said.

The ADR paradox
The U.S. hotel industry is experiencing an ADR paradox, Collazo said, noting that while occupancy has been at record-breaking levels, ADR growth is slowing down.

A year ago, CBRE and STR did a big dive into understanding what was driving lower growth in ADR and why the industry wasn’t seeing the ADR growth it had in previous cycles, Collazo said.

“We came to the conclusion in that session there was no silver bullet,” he said.

The trends were the same for both high- and low-occupancy hotels, he said.

There seems to be no new pricing power anywhere, Freitag said. The industry is in its fourth quarter of performance below consumer price index, which means its losing ground to the rate of inflation, he said.

The cycle’s length
Economic cycles have starts and then slowdowns, Collazo said. Given that this is the longest cycle in the hotel industry’s history, everyone has to expect that it will end at some point, he said. However, no one is predicting the Great Recession is coming back, he said.

Freitag said he disagreed with that assessment. Australia has been undergoing 27 years of expansion, he said.

“It doesn’t have to end,” he said. “We have seen cycles end, but it doesn’t have to.”

Everyone on panels at industry conferences in 2015 said the cycle is getting “a little long in the tooth,” he said. At the time, people were using baseball metaphors, he said. Now it might be soccer, with the industry in its second half, but there can be overtime and penalties, he said.

Citing Adam Sacks, president of Tourism Economics, Freitag said as long as the U.S. is seeing gross domestic product growth, there will be hotel demand growth.

“The probability is that it will end at some point,” Collazo interjected. “There’s a higher probability it will end than continue indefinitely.”

Freitag agreed with that point.

Looking back to be prepared
Though the current environment doesn’t match exactly what was happening in the country leading up to the recession in 2008, using that downturn can help guide hoteliers going forward, Collazo said.

It’s about having milestones, he said. When someone runs a race, they know where the finish line is, so they’re looking for milestones to help them judge their pace, he said. The industry is still using that economic data to help find those milestones, he said.

Businesses also need to build out different scenarios when they are preparing for a downturn, he said.

“If you just benchmark against one number, one scenario, there’s a high probability you’re wrong,” he said.

Comparing data from previous downturns, Freitag noted annualized room demand decreased by about a point in 1991, by 4.7% in 2001 and then by 7.1% in 2009. Applying the upper and lower parameters of those recessions to the industry’s current conditions give an idea of what could happen, he said. One percent is about 11 million roomnights lost and 7.1% equates to 92.5 million roomnights lost, he said.

In 2009, the annualized occupancy was 55.5%, which means that almost half of the rooms in the U.S. were empty that year, he said.

“That’s pretty dire,” he said.

Applying the worst-seen scenario of a 7.1% demand decline to current occupancy levels, which are at their all-time peak, shows the industry would still be selling 61.3% of its rooms, he said.

“That doesn’t sound so bad,” he said. “Operationally, you’re like, ‘Oh my god.’ You’re still selling more than six out of 10 rooms every night.”

Applying the same equation to ADR in 2019 shows rate would drop between $6 and $12, he said. However, it takes just one rogue competitor who starts dropping rate, and then everyone in the comp set reacts in turn, he said.

The main point here is that the current occupancy level will be a cushion in a downturn, Collazo said.

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