Bottom line for hotels? They haven't hit the top in terms of growth just yet, and probably won't for at least another year or two.
The U.S. hotel industry is expected to see a 10th consecutive year of growth in 2019, according to a revised forecast from CBRE Hotels Americas Research.
CBRE, a real estate and investment firm, anticipates that U.S. hotel occupancy will rise to 66.2 percent in 2019, marking a fifth straight record level, and that occupancy will be fueled by a 2.1 percent bump in demand, which will offset a hotel supply increase of 1.9 percent.
Most recently, during the third quarter of 2018, some companies — including InterContinental Hotels Group and Choice Hotels International — reported some softness in their reported revenue per available room (RevPAR). Marriott International, the world’s largest hotel company, saw its North American RevPAR go up a mere 0.6 percent.
Earlier this month, CBRE reported U.S. hotels had their second largest occupancy drop since the global financial crisis during the third quarter. However, some analysts, including CBRE Hotels Americas Research’s senior managing director, Mark Woodworth, said the relative drop in 2018 was compared to last year’s Texas and Florida hurricanes, which boosted hotel bookings.
“[Hotels] had the benefit a year ago where they had a much higher floor with which to compare themselves to year over year,” Woodworth explained. “I think it was mainly the hurricanes.”
Looking ahead, CBRE did not forecast any economic or lodging industry recessions through 2022, but did note that industry growth is expected to be curtailed beyond 2019 thanks to higher interest rates, equity market corrections, credit-market problems, and some shrinkage in employment.
Woodworth and CBRE Hotels Americas Research economist Bram Gallagher said that expectations of a slowdown in hotel industry growth have shifted by 12 to 18 months.
“We thought 2018 would be the last pretty good year, and started looking for a slowdown at the end of ’19 and the first half of ’19 with 2020 being a soft year, though not a down year. That story line is still very much intact, but you have to push the whole thing out about 12 to 18 months,” Woodworth said. The driving force behind the shift in an eventual slowdown, he said, had a lot to do with the federal tax cut imposed by the Trump Administration, as more people have money in their pockets to travel.
In short, Woodworth and Gallagher noted, the hotel industry is still relatively strong, but it does face some challenges.
Woodworth, for example, pointed out that a number of hotels are aiming for high occupancy levels, but often at the expense of room rates, meaning that while occupancy levels remain high, sometimes even at record levels, the growth of room rates has been relatively weak.
“What we’re seeing is O.K. revenue growth because demand increases have kept pace with supply increases at the macro level, but we’re seeing weak average daily rate growth.” He also added that the “significant increased cost of labor is resulting in very, very modest to nominal profit growth on the bottom line.”
Gallagher summarized the current business cycle for hotels as being “at the top” where the “engine is working at its full RPM, or rotations per minute.” He continued, “There might be some oscillations or a slight downturn, but we’re really a full capacity and when you have an economy that’s performing close to or maybe even above its natural capacity, we don’t expect a lot of growth but the upside is that the hotels are full.”
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Photo credit: The Cambria Hotel LAX. Although Choice Hotels saw a decline in revenue per available room in the most recent third quarter, hotel industry analysts predict that 2019 will be yet another year of growth for the U.S. hotel industry. Choice Hotels / Choice Hotels