The hotel industry is poised to enjoy a 10-year period of record occupancy levels through 2019, according to recent research forecasts from CBRE. However, average-daily-rate growth has not kept pace.
CBRE forecasts the annual average occupancy rate for U.S. hotels to hit 65.9 percent in 2017 and remain at this level through the end of the decade. For 2017, CBRE is forecasting an annual ADR increase of 2.2 percent, followed by 2.5 percent in 2018.
Mark Woodworth, senior managing director of CBRE, said the reasons for ADR growth being “OK but not great” are five-fold: increased supply growth; low inflation; the sharing economy; revenue management beyond revenue per available room; and book-direct and best-price guarantees.
“These all put downward pressure on the ability of operators to raise rates,” he told HOTEL MANAGEMENT, adding that CBRE’s forecasts for ADR growth in 2017 and 2018 are below the long-run average annual ADR growth rate of 3.1 percent.
Related Story: Occupancy not the metric to focus on to maximize revenue
He said that low ADR growth could have an impact on hotel profitability. Compensation costs are rising more than 4 percent, so hoteliers might not be able to sustain the growth in profit margins observed the past seven years.
“On average, hotels still should be able to enjoy gains on the bottom line, but the flow-through will not be as efficient,” Woodworth said.
The Local Factor
As hoteliers finalize their 2018 budgets, CBRE advises that owners and operators need to understand their local market conditions.
“Previous research conducted by CBRE has found that 75 [percent] to 80 percent of a hotel’s performance is dictated by local economic and market factors. Revenues will be driven largely by the business and commerce found locally and by changes to available supply,” Woodworth said.
He said labor costs are heavily influenced by the character and profile of the local population. CBRE analyzes 60 markets, and among the 31 markets forecast to achieve RevPAR changes below the projected 2.1-percent inflation rate in 2018, the average increase in hotel supply is 3.8 percent, he said. Conversely, the remaining 29 markets forecast to see RevPAR growth more than 2.1 percent will see their competition increase 2.7 percent.
“Supply change continues to be a critical local market issue," Woodworth said. "Pipeline activity across the 60 markets we analyze is very polarized and is the major influencer of our forecasts for occupancy and ADR change. The good news is that supply growth in several of these markets moderates beyond 2018.”
Related Story: How the hotel industry has changed over the past 20 years
When asked about his thoughts on industry performance heading into a new year, Woodworth said operating conditions look favorable.
“The average U.S. hotel is orbiting at a high level and is on a glide path that will lead to consistent, durable profit growth for the next two years and likely beyond,” he said. “While supply growth in some markets will undermine both rate integrity and [net operating income] increases in the near term, the longer view calls for very attractive operating conditions for most hoteliers.”