NASHVILLE -- If you ask Adam Sacks, founder and president of Tourism Economics, what he thinks of the hotel industry, you'll get a festive reply: "The last five years," he'll say, "have been a lodging industry party."
Yes, the party is still in full force, with no signs of let-up, for now. That was one of the storylines during the opening day of the Hotel Data Conference, here at the Omni Nashville.
And the data are backing it up. For instance, consumer spending on U.S. lodging in the last three years is up 25.1 percent, more than double spending on other goods.
Sacks pointed out that demand falls usually in step with GDP (gross domestic product) growth, but that now demand for rooms is actually outpacing GDP.
There is, however, need for caution, because while the U.S. economy is chugging along at a brisk clip, it's not the world over. "It's slowing down," Sacks said in reference to the global economy. "Emerging markets have been slowing over the last six months. China is a risk and equity markets have slumped."
One patch of sunlight: Travel to the U.S. has held up, up 3 percent in the first half of the year, Sacks said. "The U.S. shows continued strength and is driving global growth." Sacks pointed to an environment of high confidence, mixed with low inflation and low interest rates, spurring spending.
Turn the Volume Up
Steve Hennis, director of STR Analytics, noted record levels on nearly every industry metric. Occupied room nights are 14.3-percent above the 2007 peak, while up 3.3 percent year to date as of June 2015. Hennis, for one, isn't convinced the industry has neared the peak.
He also added that ancillary profits are growing. "F&B revenue is largely ignored," he said, "but accounts for 20 percent [of profits]. It is growing," and being driven by groups, which are helping to prop up banquets and catering.
The improvement in group business is certainly a boon for the industry and something not to be ignored. In an STR poll of hotel investors, almost half said the biggest upside going in the hotel industry is group demand recovery. The biggest risk: new supply growth.
Industry on the Move
Discussion at the conference soon turned to those in the trenches; namely, hotel executives, including the CEO of Interstate Hotels & Resorts, Jim Abrahamson, whose portfolio of managed hotels extends beyond the U.S. "We are seeing strength across all sectors in the U.S. and abroad," he said. "It's even understated."
Tom Corcoran, chairman of FelCor Lodging Trust, ever the optimist, said there is still a long way to go in this current hotel cycle. "I don't see any dynamics that are cause for worry," he said, adding that, in bad times, the industry has a wonderful ability to manage the headwinds.
Headwinds, said Jim Holthouser, EVP of global brands for Hilton Worldwide, are ubiquitous. His rosy outlook on the industry was tempered by the weakening global picture, remarking on China's slowdown. "We see that in development and performance in some of our hotels there," he said. Half of Hilton's pipeline, meanwhile, is in the U.S., a smart hedge against any overseas slowdown.
Randy Smith, who founded STR, said in all his years, he's never seen industry performance quite like this and that there are no signs of a drop. "We will continue to set records," he told the audience, predicting 18 more months of good fortune.
Supply creep is always on the mind of hoteliers. While new supply means new revenue streams for brands, it can hinder profits for owners. Luckily, as Abrahamson noted, any new supply is being absorbed by record demand. Forty percent of Interstate's pipeline is new-build hotels, he said. (What does have Abrahamson on edge are the airlines, which, he said, are restricting capacity, causing a rise in fares that could make travel more restrictive. He also criticized the big three airlines, American, Delta and United, of conspiring to restrict international carriers to fly to the U.S. Open-skies agreements are now under attack by domestic airlines in the face of rising competition by international carriers.)
"There are no full-service luxury hotels or economy hotels being built," Smith added. "It’s all in the middle and in certain markets. Not a general dispersion."
New supply is also being checked by stiffer financing parameters. To wit, lenders aren't lending with the same gusto they did prior to the downturn.
The raucous party Sacks referred to could all be shut down if the era of cheap debt returns. Corcoran, for one, hopes it does not. "Financial markets have stayed disciplined," Corcoran said. "Too much capital and risk-free debt has been harmful. When capital markets get undisciplined, that’s when it happens. If there is cheap debt, people will build. Today you need real equity. If you see 100-percent, non-recourse financing, that’s when the party ends."