Lodging recovery steady, but near-term risks remain15 Feb, 2013 By: Warren Marr
The U.S. lodging industry began 2013 on solid ground, as the momentum of the recovery remained intact, albeit within a context of heightened economic uncertainty and volatile short-term performance. Last year finished on a strong note, with a third year of robust revenue per available room growth and the first year in the recovery cycle where average daily rate growth exceeded the growth in occupancy.
Overall, hotel occupancy in 2012 recovered to 61.4 percent, exceeding its 15-year average of 60.8 percent (Figure 1). With occupancy levels approaching pre-recession levels, operators tested more aggressive pricing strategies, resulting in average daily rate growth of 4.2 percent. Looking ahead, PwC’s forecast anticipates another year of robust RevPAR growth of 5.9 percent in 2013 (Table 1), with over 80 percent of that growth coming from ADR, the highest since the recession ended.
While the lodging industry finished 2012 with stronger growth than anticipated just two months prior to year end, the near-term outlook is as challenging as ever. Although there are indications that businesses are investing and hiring, financial market stress is easing and consumers are more confident, there is also concern that such trends could reverse quickly due to domestic and international economic risks. These economic risks are detailed below.
◾ Outcome of U.S. fiscal policy: The outcome of the ongoing fiscal policy debate is anticipated to be an important factor shaping the profile of real gross domestic product growth over the next several years. While the enactment of the American Taxpayer Relief Act of 2012 (ATRA) eliminated the short-term uncertainty surrounding tax policy, three looming deadlines pose serious risks to the U.S. economy. First, although a temporary debt ceiling deal was recently reached, a more long-term solution will need to be agreed upon to ensure that the debt ceiling is not breached this spring or summer. Second, ATRA only delayed until March 1 the expense sequester (across the board spending cuts) originally enacted under the Budget Control Act of 2011. Finally, the federal government is operating under a continuing resolution that expires March 27. Unless new spending authority is legislated by then, non-essential government functions could be shut down at the end of the first quarter.
◾ Uncertainty related to the path of foreign economic growth: The global economy slowed in 2012, due in particular to contraction in Europe and slower growth in China. The Eurozone continues to be in recession, and China’s growth is being watched closely for any signs of impact on demand for U.S. goods and services. While economic conditions in both Europe and China have recently improved, uncertainty about the path of growth in these regions remains a key risk that is expected to shape U.S. economic growth.
Macroeconomic Advisers LLC, the firm that provides the underlying economic drivers to PwC’s lodging outlook, assumes the above risks are mitigated through a series of steps that both domestic and international policy-makers are taking. As a result, Macroeconomic Advisers anticipates that as uncertainty recedes and confidence boosts, U.S. businesses and consumers, with the help of foreign demand, will support a steady recovery in U.S. GDP.
With a pace of economic recovery that remains subdued, and downside risks looming, the U.S. lodging sector is reminded again of the speed with which changing economic conditions can cause a shift in operating fundamentals. Hotel owners, investors and lenders remain prepared for a range of possible outcomes, with many anticipating that results in the quarters ahead will provide greater clarity, helping confirm the contours of the current lodging cycle.