Fear of unknown, home-sharing augur uneven year for hotel industry

(Year of 2017)

In many ways, the veil of uncertainty around lodging forecasts for the year to come is beginning to lift. But it may be no consolation for hoteliers that these forecasts are a mixed bag, with a recent report from STR forecasting occupancy levels to remain flat at the tail end of 2016 before declining after eight years of growth (down to 64.9 percent from 65.4 percent in 2016). That’s far from a precipitous drop, but it’s a sign of a possibly long and bumpy road to come.

Scott Berman, U.S. industry leader, hospitality & leisure, PwC, called 2016 a nebulous year that ultimately saw a lot of deceleration take place in hospitality. Berman said the usual variables remain, such as increased supply in markets already stretched for occupancy, but new variables have also emerged to cast confusion. He counted the sharing economy, which is inflating supply behind the scenes, and a growing trend of property sales within the financial services sector (what Berman likened to “going on a fitness program to make themselves leaner and more profitable”) among the new factors that have profited at the expense of hotels.

“The robust corporate demand that we were counting on has been very uneven,” Berman said. “We don’t see that changing and we have a robust supply number. At this point, we are hoping to be proven wrong.”

Second Take

CBRE also is looking forward, releasing a report that forecasts occupancy hanging at 64.3 percent in 2017, just shy of the all-time industry high achieved in 2015 and sustained in 2016. CBRE also expects average daily rate to increase 3.3 percent in 2017, and while ADR has been on the decline since 2014, it’s still higher than STR’s anticipated 2.6-percent increase.

“Now that the [U.S. presidential] election is concluded and we know more about the future direction of the U.S., uncertainties have dropped,” said John Corgel, professor of real estate at the Cornell University School of Hotel Administration and senior advisor to CBRE Hotels’ Americas Research.

Beyond politics, Corgel said new supply additions continue to be a concern in markets that are underperforming, and there are still many markets under the optimal 2-percent supply increase threshold that continue to deal with supply pressures. In addition, a stronger dollar and weaker international economies could create some challenges for gateway cities in early 2017. But both Corgel and Berman agree that home-sharing operators continue to be a rising concern for hotels.

“Airbnb is growing at a rate that I don’t think anyone is expecting,” Corgel said. “In 2015, its growth was around 100 percent, and in 2016 I expected it to slow to around 50 percent to 80 percent, but it continued to grow at above 100 percent as it extended into tertiary markets and the vacation-rental market. That’s something that may be the biggest unknown for 2017, whether or not they make further gains into hospitality.”

Know Thy Past

According to Berman, he is leaning on the historical performance of U.S. markets in order to predict the future, and points to 2016’s poor first quarter as a possible indicator for how 2017 will begin. In addition, he has his own list of concerns, the first of which is rising inflation and potential increases to the employee minimum wage.

“I’m not against growing the minimum wage, but at what cost? If hotels are growing revenue at 1 percent to 2 percent and costs are going up 3 percent to 4 percent, then industry profitability is at risk unless the industry takes action,” he said. “Owners and brands are aligned in making some tough decisions for the coming year.”

However, the majority of the CEOs Berman speaks to show optimism, and development pipelines remain deep, though they are almost all in the select-service category. If the industry is looking for opportunities, Berman recommended more attention be paid to the resort side of the business, which he said remains undersold.

“The brands need inventory to satisfy loyalty redemption, so they should continue to look for more opportunities to affiliate in resort destinations,” he said.

Mark Woodworth, senior managing director of CBRE Hotels’ Americas Research, said his optimism comes from an expectation that there is a major change of ideas on the way, and that he hopes the hotel industry catches on in time to benefit from it.

“The profile of the domestic traveler has shifted over the last 25 years,” Woodworth said. “There was a point in time where [travelers] were incentivized by the airlines to take stays over Saturday for cheaper airfares, and that concept went away a while ago. The demand that allowed the industry to reach record occupancy came from travel we didn’t see before.”