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Taking Stock

Lodging Industry Prepares For Continued Softening On Heels Of Economic Uncertainty

Monday, August 19, 2019
Dennis Nessler
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Last week’s stock market slide in which the Dow Jones dropped some 800 points in one day triggered fears of a pending economic recession within the U.S., not to mention globally. Trade wars and tariffs, as well as several interest rate hikes over the last couple years, have apparently given investors pause. Nevertheless, a number of leading economists point to low unemployment and high consumer confidence as reasons to suggest this was nothing more than a speed bump or market correction for an economy that should continue to hum.

But while there can be some debate about a potential economic recession there seems to be little doubt that the lodging industry is entering its own recession of sorts. After nearly a decade of significant year-over-year gains, the industry has seen growth flatten out considerably. While most prognosticators started 2019 in the modest 3 percent range, RevPAR growth projections have been continually adjusted downward throughout the year by both large public brand companies as well as many research firms.

In fact, STR’s forecast has been revised to 1.6% RevPAR growth in 2019 and 1.1% RevPAR growth in 2020 (down from previous projections of 2% and 1.9%, respectively). In addition, occupancy levels have remained relatively flat from last year putting additional pressure on ADR growth to drive RevPAR growth.

There was some hope that the summer season would shake the industry out of its doldrums, but that clearly hasn’t been the case. For example, results from the first week of August highlighted the continued softening. During the week of August 4-10, the U.S. hotel industry reported mostly negative year-over-year results in the three key performance metrics, according to data from STR. Occupancy declined 1.4% to 74.1% and average daily rate rose 0.4% to $133.36, while revenue per available room dropped 1% to $98.88.

The positive fundamentals of the industry--particularly low supply growth and high demand--have been a large factor in the prolonged run of prosperity the industry has enjoyed in recent years. Those supply and demand lines, however, are poised to intersect and that as well as a slowing economy are behind some of the forecasts. Another negative trend of slowing business transient demand globally is a contributing factor as well.

However, it’s important to keep some perspective on this. The word recession tends to needlessly send people into a panic. In economics, a recession is officially defined as “a business cycle contraction when there is a general decline in economic activity.” Simply put, if the economy is not expanding it’s more than likely contracting.

And fortunately, the end of this prolonged upcycle in no way resembles the last downturn in 2008 when the financial system as we knew it collapsed, along with Lehman Brothers. Many in the industry have talked for years about wanting a soft landing and this certainly seems to be it.

So where does the hotel industry go from here? While many pipeline projects are in the works already will developers effectively pump the brakes on future projects where deals have been signed but no ground has been broken? If so, that wouldn’t be the worst thing. With demand growth declining, keeping supply growth under control would be advisable, at least from an industry perspective.

We know operating costs are always a concern and particularly when RevPAR growth slows. However, most operations run pretty lean these days even during the so-called “good times.” So the temptation for hotel owners and operators to slash payroll and eliminate jobs to squeeze more profit out like many did during the last downturn may not be an option.

Not surprisingly, rate integrity will be key for the industry in the next 12-18 months. Rate growth projections are anywhere from 1.4 percent to 2.0 percent for 2020. Utilizing advanced metrics and revenue management tools to optimize rates and profitability are critical, as are finding additional revenue streams at your property. It’s these type of little things that can add up to be a big deal as times get tougher.

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Dennis Nessler    Dennis Nessler
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