CBRE: U.S. hotel performance to slow, but recession not on horizon

What’s in store for the United States hotel industry during the next few years? The bad news: CBRE Hotels Research has adjusted its revenue-per-available-room growth outlook downward for this year and next year, according to its September 2019 edition of "Hotel Horizons." The good news: The outlook for 2021 has improved, and the firm doesn’t anticipate a full-on recession.

CBRE projects gross-domestic-product growth to average 1.9 percent during the second half of 2019, noting that this is half the pace of growth during the first half of the year. Because of this, CBRE forecasts a deceleration in U.S. hotel performance during the final six months of 2019. After rising 2.1 percent during the first half of the year, the pace of demand growth will slow to 1.4 percent for the balance of 2019. As a result, CBRE now forecasts the national occupancy level to decline 0.2 percent from 2018 to 2019.

“Fortunately, room-rate alterations tend to lag occupancy changes. Therefore, the annual increase in average daily rate will remain steady at 1.1 percent,” said R. Mark Woodworth, senior managing director, CBRE Hotels Research.

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For the year, CBRE is projecting a RevPAR increase of 0.9 percent, 110 basis points below the forecast the firm published in June 2019. The 2019 demand slowdown will show its negative impact on ADR next year. CBRE’s forecast for ADR growth in 2020 has been lowered to 2 percent.

“Downward pressure on room rates also will come from a rise in new hotel openings,” Woodworth said, adding that the firm’s 2020 supply growth forecast now sits at 2.1 percent. That’s greater than the long-run average of 1.8 percent. Woodworth said that this will drive a 0.8 percent national occupancy rate decline for the year. For 2020, CBRE is forecasting a RevPAR growth rate of 1.2 percent. This, too, is a downward adjustment from the last forecast.

While 2019 and 2020 RevPAR growth rates are disappointing, the estimated depth of CBRE’s economic slowdown forecast for 2021 has been lessened.

“The economy is forecast to remain somewhat anemic in 2021. GDP growth is forecast to be 1.5 percent, and employment levels are projected to decline by 0.2 percent,” Woodworth said. “While these numbers are not inspiring, they do represent a rosier outlook than what we were thinking when we developed our June forecasts.”

In reaction to the economic projection modifications, CBRE’s forecasts for demand and ADR growth in 2021 have been adjusted upward. CBRE forecasts a 0.8-percent RevPAR gain in 2021, up from the 0.5-percent decline projected in the firm’s June 2019 reports.

Not Time to Worry about Recession

So, while many in the industry are calling for a recession in the near term, why is CBRE saying that won’t be the case? The answer: CBRE’s forecasts are heavily dependent on the anticipated changes in economic indicators such as GDP, the Consumer Price Index, employment and personal income. With that in mind, CBRE’s view is that the U.S. economy will slow but not fall into recession.

“There has been a lot of speculation recently regarding the health of the economy over the next few years. Most people believe the economic indicators are pointing downward. The question is whether or not the U.S. economy will dive into the textbook definition of a recession,” said Jack Corgel, professor of real estate at the Cornell University School of Hotel Administration and senior advisor to CBRE Hotels Research.

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He said it is undeniable that the negative impacts of a trade war, falling exports, the employment growth slowdown, falling capital expenditures, the inverted yield curve and economic weakness in Europe and Asia will contribute to a domestic economic slowdown. “However, there are several factors that indicate the economy will not reach a full-fledged recession. These include falling interest rates, weak inflationary pressures that make it easier to cut rates further, strong consumer demand and policy easing in China,” he added.

“We foresee estimated annual GDP growth rates ranging from 1.5 percent to 2.3 percent from now to 2022,” Woodworth said. “While these numbers anticipate weaker economic growth, they do not anticipate any major setbacks in the economy.”