NASHVILLE, TN—Panelists and attendees at the Hotel Data Conference, held here at the Loews Vanderbilt Hotel, were all positive that the hotel industry will enjoy continued success for the next 24-36 months, as supply remains limited, but demand and opportunities for rate are likely to be strong.
Demand has certainly been strong in 2014, increasing at a rate that all panelists agreed no one had expected. In the opening session, Adam Sacks, president, Tourism Economics, noted that the prevailing rule of thumb is that room demand and GDP tend to move in the same direction, but that hasn’t been the case in 2014. “In 2014, GDP has been on a yo-yo with a contraction of 2% in the first quarter, followed by an expansion of 4% in the second quarter,” he said. “Meanwhile, room demand pays no attention to any of it and increases 4%, above anyone’s expectation, which is what is reflected in the hotel stocks.”
Sacks noted that this situation poses a question: “Has lodging set a new trend line from which we now need to do all of our forecasting, or is a reversion to historic trends and averages more likely?” He attributed the extraordinary growth to these factors: strong gains in personal wealth; continued stellar performance of corporate profits; growth in what have been laggard sectors; resurgence of group demand; residential power outages; and a rebound from the federal government shutdown.
Sacks added that these factors would likely be tempered in 2015, relative to 2014, so the industry will likely revert to trend. “We believe that even though GDP is going to accelerate next year, demand is going to grow not as fast as this year, bringing us back to historic averages,” he said. “I don’t want to be mistaken for the guy that thinks everything is coming to an end. I think things will continue to grow, but just not at the rate that they have been.”
Sacks pointed to some positive factors going into 2015: investment indicators show forward momentum for the U.S. economy, which bodes well for business travel; wages in real terms are growing, positioning the balance sheets of households to continue to buy hotel rooms; unemployment claims remain low; consumer confidence is at a seven-year high; and the growing importance of international. “In 2003, international guests represented just 10% of hotel room demand in the U.S. Last year was 15%. And we expect it to be 19% in 2020,” he said. “This is a significant increase in the importance of international and that’s going to certainly drive growth.”
Vail Brown, VP, global business development and marketing, STR, agreed, noting that in 2013, the U.S. captured 3% of the 85 million outbound Chinese travelers. “With initiatives that were created in 2010 with Brand USA, which their mission is to do nothing but increase international travelers to the United States, the ability to grow this demand is real,” she said. “It will not only just impact demand as a whole, it will have impact more specifically on transient and group in further years.”
Brown also noted that group demand has returned. “It didn’t recover as quickly as we thought, and then all of a sudden, we are selling more rooms than we have over prior years,” she said. “From a group standpoint in June, we sold 1.5 million more rooms than we sold this time last year, which finally brought us to some group demand growth in the positive. Year to date, group demand is up 0.9%. For the month of May alone, group demand was up over 10%. We’re finally in the positive.”
Katie Moro, director of business intelligence product, demand, TravelClick, Inc., also highlighted the importance of group. She noted that her company tracks on-the-books numbers, and “looking further out to the beginning of next year, you see some strong group in May and June year over year, so that’s exciting to see that as you head into summer.” Moro added that group being positive is always a good sign, but she is concerned by the slowness of the pace. “In my opinion, group is very telling of what’s to come. If the group pace doesn’t pick up more and we end up not doing as well in group, then I think the transient suffers,” she said. “If it continues to be a slow pick up, then I think maybe we are at the peak as far as rate growth. If we level off on group, transient will follow. Maybe not immediately, but eventually it will follow and level off because you don’t have that confidence of pricing.”
Brown noted that even with this group bump, “we’re still seeing this trend to continue where transient has the greater share of the total occupancy.” Moro said that while transient is doing better than group, particularly the retail segment, one thing hoteliers should look out for is wholesale. According to TravelClick, year to date wholesale has seen a 0.9% decrease in occupancy growth and the outlook is a decrease of 3.3%. “If you have hotels in strong wholesale markets, that may be something to pay attention to,” she said, noting that strong wholesale markets like Honolulu, Miami and New York are behind many of the other top markets in terms of occupancy.
Brown also said that demand isn’t the only KPI that has excelled lately. “In 2013, we had more rooms to sell than we’d ever had before,” she said. “Secondly, we were selling more rooms than we’d ever sold before. And even better news, we were selling them at a higher rate than we had ever sold before. That good news did not stop as we moved into 2014.”
Brown added that current supply growth is at 0.7%, well below the 20-year average of 1.7%. “Although the growth is not that fast, keep in mind, we still have over 167 million more rooms to sell than we did in 2007,” she cautioned. “We are demolishing less rooms than we have historically. In 2007, our industry closed more than 35,000 hotel rooms. At the end of 2013, we were at about 18,000. Oftentimes we talk in our industry that we have a tendency to be oversupplied. In looking at this data, I think one question would be are we under-demolished?”
Nevertheless, in the general session titled “Are we there yet? When the U.S. hotel industry will reach its peak,” panelists also expressed a positive outlook for the future. Robert Mandelbaum, director of research information services, PKF Hospitality Research, said, “We’re at a stage in the cycle where it’s very predictable. Predictability implies less risk. You have a pretty good idea what the business environment is going to look like the next 3-4 years.”
He enumerated factors that have historically caused the cycle to turn and what the likelihood of that is in the near term: “An economic recession, but they’re projecting employment income GDP going up next year, so there’s no recession prediction from the economists; Oversupply is not a near-term issue; Oil prices, gasoline doesn’t seem to be an issue at this time; there’s still room to go up in real estate prices, so a lot of the factors that have caused recessions in the past don’t seem to be in the cards for the next few years.”
He noted that this doesn’t, of course, rule out an unpredictable catastrophic event. “The Middle East, Ukraine, Ebola, these are the types of things that have the potential to trigger a catastrophic event, but by their nature they are unpredictable so you can’t count on it happening,” he said. “If you look at the basic fundamentals, there isn’t a lot there to indicate that we’re going to see an immediate downturn. Rather than peak being a turning point, [we’ll see] a level of strong performance for a good number of years.”
Daniel P. Hansen, president and CEO, Summit Hotel Properties, predicted that this will be a longer cycle than shorter. “We’ve watched through multiple cycles, and there are actually components that don’t change,” he said. “What does feel like its changing is the amplitude of the oscillations in the cycle: higher highs and lower lows.” Hansen attributed this to the transparency that’s in the industry now. “Social media and the data is really allowing things to be at higher levels than they have in the past,” he said.
Both Mandelbaum and Amanda Hite, president, STR, presented updated 2014 forecasts for their respective companies. STR forecasts a supply growth increase of 1%, 3.6% in demand, 2.6% in occupancy, 4.2% in ADR and 6.9% in RevPAR. Meanwhile, PKF predicts a 0.9% increase in supply, 3.7% in demand, 2.8% in occupancy, 4.5% in ADR and 7.3% in RevPAR.
“We forecast a 6.9% increase in RevPAR growth for 2014, a significant increase over what we were forecasting a quarter ago, entirely due to the demand increases we saw the first six months of this year,” said Hite. “We expect it will slow some the second half of the year, but we’re still going to have strong demand increases and that supply growth is building in a little slower than we expected. So we’re taking the supply down to 1% for the year.”
Mandelbaum noted that 90 days ago, PKF forecast 6.7% for year-end 2014 RevPAR growth. “The increase in our RevPAR forecast from 90 days ago was 90% attributable to an increase in demand,” he said. “We feel pretty confident about 7.3% given what would have to happen to be lower than that in the second half. You could even argue that 7.3% might be on the low side.”
The executives also presented an updated U.S. hotel forecast for 2015. STR forecasts a 1.3% increase in supply, 2.1% in demand, 0.7% in occupancy, 4.4% in ADR and 5.2% in RevPAR. PKF forecasts a 1.3% growth in supply, 2.5% growth in demand, 1.2% in occupancy, 5.4% in ADR and 6.7% in RevPAR.
“As we upped our forecast for 2014 from 90 days ago, it did result in a lowering of our RevPAR outlook for 2015, mostly due to a rollback in demand that makes recovery quicker in 2014, therefore reduces the demand growth in 2015,” said Mandelbaum. “In general, our forecasts have tended to underestimate demand growth and overestimate ADR growth. That could happen again next year, but we think that we’re at that point in the cycle where the basic economics of supply and demand say that rates have to go up.”
Hite countered, “For STR, we completely agree, we just don’t have a lot of confidence that we’re going to see that rate growth because we’ve been saying that for the last two years, and while there was a lot of opportunity there for rate growth, we’ve seen the 4.2% rate growth every month. I’m not saying that’s bad, it’s just really hard for us to say we’re going to see anything more than that for 2015.”
“I think we all need to go out there with some swagger again and confidence in pushing rate and asking for rate. The data we have points to positive things ahead,” noted Hansen. In his session, Sacks agreed about the opportunity for rate. “The reality is occupancy rates will remain elevated, so the opportunity for rate remains quite strong,” he said.
“The next 24-36 month are going to be very good; Good, sustained growth for the industry,” continued Hite. “I can’t pinpoint the peak but we’re looking at a good 36-months run of strong demand, RevPAR and rate growth, and opportunity for even more rate growth.” Mandelbaum offered, “I think there’s potential for a 3-4 year window of sustained RevPAR growth.”