Trump, taxes, immigration offer hope and angst at ALIS conference

L.A. Live in Los Angeles, site of the ALIS conference. Photo credit: Merkuri2//Getty

No matter the venue, President Donald Trump is the talk of the town. As real estate mogul, he once spoke at the Americas Lodging Investment Summit, here at the JW Marriott L.A. Live; as U.S. president, it's his bravado and policy-making that are being examined and debated by the collective hotel industry, as it convened for the first large gathering of the year, which often serves as a baseline for the year to come. 

"Dealing with the New Normal" is the theme for this year's conference, an apt tagline: while consensus held the industry's peak as long out as a year ago, there still is no sign of let up, no precipitous drop, as record occupancies and demand remain the norm.

Prognosticators, such as CBRE Hotels' Senior Managing Director Mark Woodworth, are now describing what he called "a cycle within a cycle," which could extend for as much as 12 months more with a "high peak level of performance," Woodworth said, 

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Post recession, the economy is in its ninth straight year of growth, even though an average business cycle is usually around six years before there is a blip. And with the recent change in tax code, expected to fuel further growth for companies, particularly the C-corps that make up the vast collective of publicly traded hotel companies, many are still wondering where the peak is. 

Still, there is cause for pause. While an estimated 1.2 billion global trips were taken last year, of the top 15 countries in the world, only two have seen travel dips: Turkey and the U.S., noted Katherine Lugar, CEO of the AH&LA, the trade group of the hotel industry. The Trump administration's travel ban, notably, is blamed as having a deleterious impact on inbound travel to the U.S. 

"There is a great opportunity for this administration to message to the world that we are open for business," Lugar said, adding that the harmful impact isn't just on the hospitality industry, but on retail, restaurants—all industries that benefit from inbound travel. That impact has amounted to lost revenue of as much as $32 billion, Lugar said.

The biggest sticking point of the government shutdown, immigration, was also a point of discussion at the conference. And with unemployment expected to dip below 4 percent, finding staff to operate hotels becomes that more difficult. "The hospitality industry offers such opportunity for young people, and how would we manage without foreign workers?" asked Gerald Lawless, the former CEO of Jumeirah Hotel Group, now chairman of the WTTC. 

Numbers Game

Hotel data remain positive, according to many data reporting agencies. While a rise in interest rates could cool down the industry, new supply is not considered to be detrimental. The outlook for the hotel industry, according to STR, is positive, if not modest. STR forecasts a 2-percent rise in supply in 2018, coupled with a 2.3-percent uptick in demand. Meanwhile, occupancy is expected to rise only 0.3 percent, while ADR is forecasted to grow 2.4 percent, leading to a RevPAR increase of 2.7 percent.

One of the larger storylines of the conference is the anemic growth in average daily rate, even in the face of steady occupancy and demand, a trendline blamed on a host of impacts, including Airbnb. 

"The story is how wrong we were on how we got to RevPAR," Woodworth said. "Demand has been on the positive side, but pricing hasn't moved much." Woodworth added that 2017 was the first year there was real decline in ADR when there was not a recession.

Added Carter Wilson, VP of consulting and analytics at STR, "Confidence is an issue with rate."

And while rate growth, especially on the transient side, has been weak, Cindy Estis Green, CEO and co-founder of Kalibri Labs, noted that rates are higher, "but third-party intermediaries are collecting more of it." She also said that hotels have become fixated on RevPAR index, which pushes them to strive for occupancy gains over rate gains.

The good news, Estis Green said, was that while online travel agencies continue to grow in influence, brand.com has been effective in blunting their sprawl, with tactics such as member rates convincing travelers that booking direct is, all things being equal, cheaper. Meanwhile, for an owner, brand.com, while not a free channel, is about a quarter the cost of OTAs.

Taxman Leaveth

The new tax code, successfully passed by Congress, should have positive ramifications for the hotel industry, argued a panel on the impacts of the new tax code on lodging, and led by CNBC's Simon Hobbs.

The drop in corporate tax rate to 21 percent and a one-time 15.5-percent tax on repatriation of overseas cash, in addition to changes in take-home pay, should have a beneficial impact on travel. "People will be pleasantly surprised by the additional income," said Michael Van Konynenburg, president of Eastdil Secured. "This boost will increase demand and spending."

Added Rachael Rothman, an analyst with SGI, "When people see that money in their paycheck, they will spend it—that's a help for hotels."

Overall, Rothman sees the change in tax code benefitting the lodging industry when companies, in lieu of saving money or returning it to shareholders, send their employees traveling. "When companies start chasing new business," she said, "that's when they put people on the road." 

Added Van Konynenburg: "An uptick in lodging is a signal of investment—that companies are sending people out there."

And though a pick-up in travel could be in the cards, costs continue to hamper hotels' profitability. This is especially true on the labor side, which accounts for almost half of a hotel's costs. "Labor is increasing four to five times the rate of RevPAR," Rothman said. "Owners are carrying inflationary costs and RevPAR hasn't moved."