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Touching Down?

ALIS Predictions Suggest Soft Landing For Industry With Slowing RevPAR Growth

Friday, February 01, 2019
Dennis Nessler
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So the industry performance predictions were unveiled at ALIS earlier this week by the seemingly growing number of hospitality research firms and the consensus is that 2019 is poised to be a ‘good year’ but certainly not a great one. The requisite numbers being thrown out as far as projections for this year seem to all being in the vicinity of RevPAR growth of slightly better than 2 percent.

When you consider that the overall U.S. lodging industry saw RevPAR growth of approximately 2.9 percent in 2018 that’s not an insignificant drop. In fact, many operators have told me it takes at least 3 percent RevPAR growth just to break even as operating costs continue to rise. Nevertheless, it is still net growth and most of the forecasters remain generally positive that conditions will remain stable for both the short-term and the long-term. The two biggest factors for the more or less ‘optimistic’ outlooks are the relative lack of supply growth in the industry and a solid U.S. economy.

However, from my perspective there is at least some cause for concern. For starters, the supply and demand lines are finally intersecting after years of demand outpacing supply. According to STR, supply and demand are both expected to grow at 1.9 percent in 2019. History tells us this is a red flag, particularly if, and no doubt when, supply begins to outpace demand.

We all know that in every cycle the industry is sooner or later guilty of overbuilding and most experts have attributed much of the sustained growth in this extended upcycle to the fact that development has been largely kept in check. But the reality is, we’re not done with this cycle just yet and here are a couple of things to consider in terms of supply. Think about the myriad new brands that have been introduced in recent years, a number of which are entirely new construction, such as Tru by Hilton and IHG’s Avid, just to name a couple of recent examples. Many of those projects are in the proverbial pipeline we you can expect supply to keep ticking up, particularly as we get into 2020.

The other factor with regards to supply doesn’t involve hotels at all, but rather the ‘disruptors.’ Home sharing companies like Airbnb and VRBO continue to grow their distribution and anyone who thinks they are not cutting into hotel demand is fooling themselves. In addition, as the segment matures and competition increases it’s only logical to assume that hosts are going to step up their game by offering more amenities and value adds. I’m not suggesting it’s equivalent to staying in a reputable hotel but the younger generation--which will continue to grow in terms of discretionary spending--has zero reluctance about booking an Airbnb for a cheap stay in a city they’ve never been to before.

So given the supply challenges, the health of the economy becomes more critical than ever to ensure demand keeps pace. Fortunately, GDP growth and consumer confidence, not to mention employment, have remained strong. However, it’s a volatile political environment to say the least. For example, the country is just coming off the longest government shutdown in history and there’s another one possibly in the offing. Anyone federal employees impacted by the shutdown will certainly be thinking twice about planning any vacations for this summer. Rising interest rates also pose a real concern to the economy.

According to analysts, the projected RevPAR growth in the coming year is expected to come from increases in rates not occupancy for the first time since 2007. That seems to be the wild card for the coming year and further underscores the importance of consumer confidence and their likelihood of traveling.

Despite the aforementioned concerns, there’s plenty for this industry to feel good about. After all, it’s been an unprecedented run of success and even if the numbers aren’t showing significant growth we need to remember they are being compared against decidedly positive results. But there’s been much talk in the industry about a soft landing and the reality is we may be touching down very soon.
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Dennis Nessler    Dennis Nessler
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