NEW YORK—“How do you feel about the economy?”
Mark Woodworth, senior managing director at CBRE, asked this question to a silent crowd of hospitality professionals this past Sunday. Behind him a presentation slide addressed the audience with another question: Is the end near?
Woodworth was among the first speakers at this year’s HX: The Hotel Experience conference (formerly the International Hotel/Motel & Restaurant Show), and the recent presidential election could not be ignored. Moreover, he insisted how operators and travelers perceive the future of the U.S. will affect how that future plays out.
“What will the economy be like a year from today?” he asked again. “Will it be the same, better or worse? How you feel affects how you behave. There is a limit to how much weight one can put into sentiment, but with the extreme economic uncertainty we have today, how you feel takes on an extra impact.”
In asking this question, Woodworth provides data. Through September, year-over-year, occupancy growth was flat with almost no change at all, reflecting the level of uncertainty felt in the market. However, Woolworth said there are five elements, historically, that on their own or combined can end the “good” times and create a downturn:
- Economy. Woodworth said analysts anticipate a mild recession in 2019, but there are no short-term concerns regarding the economy.
- Overbuilding. Some major markets such as New York City continue to see booming occupancy but overbuilding is hurting rates. This is far from the norm, though, and according to Woodworth there are only a handful of markets nationally that one could argue have too many rooms.
- Unpredictable demand shock. This is always a potential factor, such as the terrorist attacks on Sept. 11, 2001, or the global financial crisis that began in 2008, but they cannot be predicted.
- Oil and energy price increases. Woodworth called this a “historic “ problem, but areas of the central U.S. have the opposite problem—low energy prices are presenting challenges.
- A potential asset price bubble. Woodworth said studies show no industry can tell they are in a bubble while they are still in one, but outside of potential federal interest rates shifting there are no concerns on the horizon.
Woodworth put to bed any myths of overbuilding, showing that the industry has still not surpassed its peak construction activity. In fact, the industry is down 18 percent when it comes to properties in construction, and 49 percent with regards to properties in the planning stages.
“We do think occupancy has peaked,” he said. “We are comfortable that supply will stay above its average, and [revenue per available room] won’t be as good as what we’ve seen in the recent past but it will run close to the average.”
Sharing Economy Effect
Woodworth also noted that times are good for many in the industry, but not everyone. Roughly one-third of all U.S. markets are in expansion mode and have returned to the previous cycle’s RevPAR peak, with Nashville leading the charge and operating at 30-percent higher levels of RevPAR compared to the last cycle. However, just as many markets are struggling to fully recover, such as Tucson, Ariz., and San Antonio, and other markets, such as New York City, have recovered before falling back into recession levels of RevPAR. According to Woodworth, the sharing economy is to blame.
“Airbnb is growing at an increasing rate, and they key to their growth is the success of traditional hotels,” Woodworth said. “The higher the RevPAR in a market, the greater number of Airbnb units. There is an economic incentive for people to look for lodging with lower rates.”
This problem could be exasperated by growing international travel. The largest Airbnb market in the world is Paris, and Woodworth said those that have an affinity for the sharing economy will bring their habits with them to the U.S. Airbnb made almost $600 million in New York City alone during the last year ending in June, and almost zero of that was taxed while hotels pay a tax of 5.9 percent in the city.
“It’s up to the host to collect on taxes, so it’s unlikely this is happening in New York,” Woodworth said. “The American Hotel & Lodging Association is doing a lot to establish a level playing field with the sharing economy, but the volume of hosts in New York City is equal to 15.5 percent of traditional hotel companies in the area. But the New York market is mature; they can grow much more elsewhere.”
Woodworth also said the impact of a strong U.S. dollar may be felt throughout the industry in 2017. As the dollar grows in strength, the level of spending goes down throughout the industry, so it may not necessarily translate into a win for hotels. However, a six-month lag in data accounts for continued uncertainty on the subject.
“Think of key gateway cities, the real challenge comes now as international travel suffers,” Woodworth said.
All in all, Woodworth’s message was against gut reactions and trends toward cautious optimism. “Our forecast bias is to the upside given the pro-growth posture of the new [presidential] administration,” he said. “We’ve been at this forecasting thing for 20 years now; we aren’t often 100-percent accurate. But we believe that if we aren’t spot on about 2017 it will be because next year will be better than we thought.”