U.S. hotel performance still growing, but what’s on the horizon?

The United States hotel industry is experiencing record performance as low unemployment (3.5 percent as of September, according to the Bureau of Labor Statistics) translates to higher wages and increased consumer confidence that leads to more travel, according to a new national hospitality report from Marcus & Millichap.

The summer season, in particular, was sunny for the travel industry, according to the report. Year over year in July, domestic passenger air travel increased 3.8 percent, marking a new high since 2003. This growth translated into demand for hotels in scenic destinations. However, overall occupancy for U.S. hotels fell to 66.2 percent by the end of the second quarter of 2019, which was the first national decline since 2010. Marcus & Millichap pointed to supply growth as the culprit. (According to STR, U.S. hotel supply has increased 2 percent so far this year, with demand rising right in line.)

Additionally, the research showed that occupancy has improved for affordable hotels in the economy and independent segments. What’s more, these hotels have a unique opportunity to continue to drive that demand. According to the data, these segments combined only account for 12.2 percent of the construction pipeline. Thus, low supply equals higher demand.

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Even so, Marcus & Millichap pointed out that occupancy still is close to historical highs and is leading to gains in average daily rate and revenue per available room, which each increased 1.7 percent during the 12 months ending in June. Strong demand for luxury hotels added to a 2.9 percent jump in ADR for the chain scale to $340.24 at the end of the second quarter. Rising occupancy for independent hotels led to a segment-leading 3.2 percent increase in RevPAR to $83.14. Economy hotels also performed well, with RevPAR increasing 2 percent to $37.64.

Looking to the largest metro cities in the U.S., San Francisco was a clear winner, according to the data. The city led RevPAR growth with a 6.3 percent jump to $205.27. Other markets, such as San Diego and Norfolk/Virginia Beach, Va., grew RevPAR more than 3 percent, helped by a strong spring and summer travel season.

On the Horizon

Of course, it’s not all sunny days ahead. Analysts noted that sentiment is starting to shift as trade tensions, a potential downturn and concerns about the near-term economy circle overhead. That means travelers are set to become more sensitive to price and finances, causing people to shorten or delay trips. As a result, Marcus & Millichap expects U.S. hotel occupancy to stay flat this year.

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Additionally, travel from Chinese visitors to the U.S. has started to decline after years of growth. These high-spend travelers are important revenue drivers because they spend 50 percent more than visitors from other countries, about $6,700 per trip on average, according to Marcus & Millichap. While annual visitor growth from Chinese travelers averaged 15.8 percent from 2012 through 2018, the figure has dropped 3.1 percent year to date through May 2019.