HM on location: Analysts discuss industry statistics

Pictured left to right: Amanda Hite, president/CEO, STR; Mark Woodworth, senior managing director, CBRE Hotels’ America Research [moderator]; and Stephen Rushmore, Jr., president/CEO, HVS, discuss performance metrics during a session at the NYU International Hospitality Industry Investment Conference. Photo credit: Jessica Alva

NEW YORK — During the "Statistically Speaking" session at the 41st Annual NYU International Hospitality Industry Investment Conference, leaders from STR and HVS discussed current trends and shared insights on the overall future of the hotel industry.

Reaching the Peak

Stephen Rushmore Jr., president/CEO, HVS, said the industry has finally reached the end of the overall investment cycle—but told Hotel Management that the downturn is probably the “softest landing I’ve seen so far,” with “nothing out there that causes us to be concerned.” In particular, Rushmore noted that unlike previous down cycles, this one will not be driven by supply, which he attributed to lessons learned over the years. “As a result, I don't think this cycle is going to have the precipitous drop-off that others have had from an oversupply of hotels.”

In fact, the rising cost of construction has made the feasibility of new hotels “increasingly challenging,” he said, with fewer banks willing to finance developments.

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During the conference, STR and Tourism Economics released a forecast projecting that the U.S. hotel industry will see overall performance growth of 2 percent for 2019 and 1.9 percent for 2020. The growth figure for 2019 is lower than the 2.3 percent increase projected in February of this year. “With each recession, [average daily rate] fell faster and farther after occupancy started to decline,” said Amanda Hite, STR’s president/CEO, during the session. “We will see occupancy decline in 2020—we’re already seeing it in some markets.” However, she said, STR expects ADR to remain “positive and growing,” even as the cycle starts its downturn. 

“The first quarter of the year came in worse than forecasted on the ADR side, and while the indicators point to better performance the remainder of this year, we lowered our [revenue per available room] projection 30 basis points, mostly as a result of Q1 performance,” Hite said in a statement before the conference. “The good news is that we continue to set monthly demand records and occupancy has been a bit better than expected. Economic momentum is slowing, but consumer confidence and a low unemployment rate should aid more meaningful performance growth as we get into the busy summer months. Forward-looking U.S. air-travel bookings remain steady and vacation intentions are on the upswing compared to the two previous years."

Strengths and Values

Of all the industry segments, Rushmore expects leisure-focused hotels to see a greater hit to their business in the coming years compared to group or corporate-focused properties. “If you take a look at where the RevPAR growth has occurred over the last few years, it's been driven by leisure and transient, and what goes up can also come down,” he said. This wound, he added, may be self-inflicted, with consumers increasingly wary of hotel deals. For example, Rushmore cited resort fees, calling them “out of control” and driving consumer distrust. Similarly, few hotels actually honor best-rate guarantees, he claimed, further causing consumers to distrust vacation-focused hotels. Business and group travelers, on the other hand, will always need specific types of hotels for their events, and even negative perceptions may not hurt that segment of the business.

In general, HVS expects hotel values to remain stable for the coming year. “Macroeconomically speaking, I can’t think of very much that could cause meaningful increase of value,” Rushmore said during the presentation, emphasizing that value appreciation may no longer come from the market. Instead, values must be created by the asset through good marketing and good management. “Sometimes that can happen from repositioning or changing brands, or finding alternative revenue streams,” he told Hotel Management, adding that the mature phase of cycle is going to require a very strong management team. At the same time, higher labor costs and minimum-wage increases are threatening value appreciation, he said. 

Revenue Growth

RevPAR increased 2.9 percent in both 2018 and 2017, Rushmore said, noting that the that growth level was the lowest RevPAR percentage change for the country since 2009. 
With RevPAR growth still positive and with other asset classes realizing yield compression, hotels are becoming increasingly attractive investments. Rushmore advised owners to hold on to their assets for eight to 10 years. “Hotel real estate is very resilient, but you need to be patient and avoid over-leveraging,” he said. “The median holding period is roughly half that time. Owners, hold your assets if you are enjoying a good cash flow and sell if the asset value is well above replacement cost.” Looking forward, given that occupancy is strong and because of supply constraints, Rushmore said that RevPAR growth should come from rate.

Top Markets

Even though supply growth has been gradual on a national level, STR has already seen the impact of new inventory in major markets. “The select-service segments—and construction activity—has been up for seven straight months overall,” Hite said. “Additionally, labor costs have outgrown revenue for two consecutive years, which is placing more pressure on already shrinking profit margins.”  

10 U.S. cities have pipelines that are at least 5 percent of their existing stock, according to ​​​​STR.
Photo credit: Jena Tesse Fox

Several markets are poised to see a significant uptick in rooms. San Diego, New York, Nashville, Kansas City and Austin have “a pretty strong pipeline” in gross numbers, Rushmore said. Hite noted that since October, the number of hotel rooms in active construction has increased nearly 10 percent. 

STR expects a majority of the top 25 U.S. markets to register RevPAR growth in the range of 1 percent to 3 percent for the remainder of the year, according to STR’s report, with three markets poised to fall within a growth range of 3 percent to 7 percent: Atlanta, San Francisco/San Mateo and Tampa/St. Petersburg, Fla. 

At the same time, Rushmore predicted Kansas City, Mo.; St. Louis; Memphis, Tenn.; Miami; and Omaha, Neb., will experience RevPAR decline in the next two years, although he emphasized that this decline will not be significant and will be driven by supply growth. In a smaller Midwestern market, he said, an extra hotel or two can have a significant impact on room supply. “So it’s nothing to be concerned about at this point,” he said. 

Of all markets in the country, HVS expects San Francisco to see the greatest RevPAR appreciation in the next two years, which Rushmore credited to a range of factors, particularly increased demand from the expanded and renovated Moscone Center. “Also, it’s more difficult to get new hotels built in San Francisco,” he said, noting that one hotelier was expecting to pay $600,000 per key on a proposed project. “It’s hard to make the numbers work with labor costs, construction costs and the lack of opportunity there,” Rushmore said. “That puts existing hoteliers in a good position to drive rates.” 

STR expects all but four major markets to see RevPAR increases of between 1 percent and 3 percent in 2019. Three markets are expected to fall within a growth range of 3 percent to 7 percent: Atlanta, San Francisco/San Mateo and Tampa/St. Petersburg. On the other side of the forecast, five markets are likely to see a year-over-year RevPAR comparison between -2 percent and 1 percent: Houston, Miami/Hialeah, Minneapolis/St. Paul, Philadelphia and Washington, D.C. 

In 2020, all but four major markets are projected for RevPAR increases between 1 percent and 3 percent. Boston, Miami/Hialeah, Norfolk/Virginia Beach and San Francisco/San Mateo are expected to see RevPAR increases between 3 percent and 7 percent. 

Looking Ahead

For 2019 as a whole, STR expects the U.S. hotel industry to report a 0.1 percent increase in occupancy to 66.2 percent, a 1.9 percent rise in ADR to $132.32 and a 2 percent lift in RevPAR to $87.65.

Among chain scales, the economy segment is likely to report the largest increase in occupancy (+0.5 percent). Luxury chains are expected to post the highest growth in ADR (+2.3 percent). Independents are expected to see the highest jump in RevPAR (+2.2 percent). While all segments should report RevPAR increases for 2019, the lowest rate of RevPAR growth is projected in the midscale segment (+1.2 percent).

The forecast for 2020 remains mostly the same. STR and Tourism Economics project a 0.2 percent decrease in occupancy to 66.1 percent, a 2.2 percent lift in ADR to US$135.17 and a 1.9 percent rise in RevPAR to $89.36. Occupancy in the U.S. has not declined year over year since 2009. 

STR expects the highest overall rate of RevPAR growth (+2.2 percent) for the luxury segment, while the lowest (+1.4 percent) is projected among midscale chains.