August 29, 2018

Hotel Analysts on How the Last Decade Shapes the Future

Experts at the Hotel Data Conference share their insights into how U.S. hotels have fared for the past decade
and what that means for the industry going forward.

The hotel industry was in a bad place a decade ago, but since then hoteliers in the United States have enjoyed an unprecedented demand environment that continues to fuel performance today.

Speaking during the ÒTen years of data + two industry analysts = Insights to current industry trendsÓ session at the Hotel Data Conference, Isaac Collazo, vice president of performance strategy and planning at InterContinental Hotels Group, said the current environment is truly unique in the history of the industry.

ÒWeÕre in the best demand environment weÕve ever seen as an industry,Ó he said.

And simultaneously, the U.S. hotel industry has enjoyed relatively low supply growth, although Collazo noted the impacts of new supply have been felt more acutely in some areas than others, both geographically and speaking of chain scales.

Interstate and small metro markets and suburban locations drew the majority of new properties, according to data from Hotel News NowÕs parent company, STR. Upscale and upper midscale were the dominant chain scales when it comes to supply added over the past decade.

Jan Freitag, STRÕs senior vice president of lodging insights, noted that from a macro perspective he is Ònot super worried about supply.Ó

Collazo said a tight market for construction labor has acted as a limiter on new supply, but he said his company and other publicly listed hotel companies continue to announce Òrecord signingsÓ for new hotels, so it probably isnÕt safe to assume supply growth will remain favorable indefinitely.

ÒThereÕs a slow down because of other variables in the market like the cost and scarcity of labor,Ó he said. ÒIÕm not sure how that will continue to play out.Ó

But Freitag noted there are encouraging signs that supply could continue to tamp down, as STR has tracked a drop in the number of unconfirmed rooms in the pipeline.

Current environment

The issues of a decade ago were sparked by a uniquely deep and troublesome global recession, the likes of which had not been seen since the Great Depression in the early 20th century. Conversely, economic indicators are decidedly more positive today, with second-quarter gross domestic product growth hitting 4.1%Ñthe highest point in nearly four yearsÑunemployment hovering at 4% in June and corporate profits growing 4.9% at the midpoint of the year.

ÒWeÕre in a great place,Ó Collazo said. ÒWe havenÕt seen this type of growth in some time.Ó

Freitag noted, though, that current growth is Òprobably not sustainable,Ó and Collazo noted a downturn has to be expected at Òsome point,Ó especially as the industry is celebrating 100 consecutive months (and now more) of revenue-per-available-room growth.

But those long-term concerns donÕt mean hoteliers shouldnÕt be enjoying the good times right now.

ÒWeÕll take it,Ó Collazo said of the current growth trajectory.

While indicators like low unemployment are good signs for sustained demand, there is an obvious challenge that presents itself on the operations side of the business.

ÒUnemployment is very low, which means as we build more, itÕs harder and harder to get employees,Ó Collazo said. ÒThatÕs a number we should be watching.Ó

Freitag agreed unemployment is Òabsolutely the main concernÓ as it puts Òa lot of pressure on wage growth.Ó

Is the cycle over?

With the extended period of strong performance and some continued reasons for optimism going forward, Collazo and Freitag questioned whether itÕs now fair to look at the current state of the U.S. hotel industry as being at the beginning stages of a new lodging cycle, as opposed to the ending stages of an especially long cycle.

Collazo said he ultimately agreed with that assessment.

ÒIf youÕre looking at the indicators É everything is going in the right direction,Ó he said.

He noted data shows the industry is selling more beds per capita than at any other point in history, and the bounce back of oil-driven markets, which lagged in recent years due to low oil prices and depressed demand for new drilling, have further spurred demand going forward. According to STR data, up to the end of June, the West South Central region of the country, which includes Texas and its many prominent oil markets, leads the way in terms of demand growth.

The rate question

The one continued sticking point and where the current cycle has fallen short compared to previous ones seems to be tied to a relative lack of rate growth, especially considering the supply-demand environment.

Average daily rate growth Òshould be amazing,Ó Freitag said. ÒItÕs not.Ó

But Collazo said this isnÕt simply an anomaly and could be a function of several factors about the industry and economy that are fundamentally different than in previous cycles.

ÒWhen we came out of the Great Recession, inflation was nonexistent,Ó he said, noting hoteliers have also had to cope with Òincreased price transparencyÓ along with corporate procurement initiatives and stricter travel policies.

Freitag said that when adjusted for inflation, ADR growth is roughly flat today and only upper midscale and independent hotels have managed to match and surpass their pre-recession peaks.

Copyright 2018 STR, Inc. All rights reserved. From By Sean McCracken.

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