If the shutdown continues, you can count on a negative impact in markets beyond the Beltway.
There’s been plenty of discussion as to how the current U.S. federal government shutdown is impacting the travel industry — from long security lines at airports to national park closures — but now it appears to be impacting the hotel industry, too, especially those hotels that cater to government-related business travel.
“Our performance of revenue per available room (RevPAR) on a month-to-date basis is nearly 20 percent below last year,” said Mark Carrier, president of the B.F. Saul Company Hospitality Group, which owns and operates 16 upscale and extended stay hotels located in the Washington, D.C. area. “We are seeing fairly significant cancellations of groups, some of which are rebooking for the future and others that are not.”
Carrier said he estimates that the overall volume in his hotels, regionally, “is at least 40 to 50 percent related to the economic impact of government contractors and all of the people associated with that. The shutdown does have a very significant effect.”
The most recent data from STR Global, which tracks hotel industry statistics on a daily basis, supports Carrier’s observations.
While the days following New Year’s are traditionally slower for the hotel business overall, occupancy, RevPAR, demand, and revenue were significantly down for the 736 hotels representing some 114,408 rooms throughout the D.C. area.
“If you look at it on a day-by-day basis, the impact for the decline in the market over that two-week period of time is pretty stunning,” Carrier said, referring to the period from December 23 to January 5. “We just had what we could consider as a full business week in the region, and the RevPAR on January 2 was down almost 15 percent, followed by 10 percent the next day, 12 percent on Friday, and down 27 percent on Saturday. That’s the holiday week following New Year’s Day, but it’s certainly not headed in the right direction.”
Jan D. Freitag, a senior vice president of lodging insights for STR Global, however, believes “it’s still too early to tell” for certain whether the government shutdown is hurting the larger U.S. hotel market. “Going forward, the impact could be more pronounced if government contractors aren’t coming to town and if small meetings that government entities are holding are being cancelled on very short notice and hotels can’t rebook other groups or make up the demand with transient business.”
“The government is a bigger piece of the pie in D.C.,” said Michael J. Bellisario, senior research analyst with R.W. Baird, who recently penned an investors’ note about the potential impact of the shutdown on hotels. “It’s hard to tell this first week of January, but we’re keeping an eye on this. It’s now day 21 of the shutdown and we’re just a few days away from the longest government shutdown in history.”
In his investors note, Bellisario noted the government shutdown was “another headwind in an already-weak market” being challenged by “supply increases, a weaker convention calendar, and reduced lobbying activity.” He also noted that Marriott, which has “outsized exposure to D.C. versus peers” may also be more likely impacted by the shutdown than its peers, including Hilton. Marriott CEO Arne Sorenson also noted in the company’s third quarter earnings call that weakness in the D.C. market contributed to the company’s overall weaker-than-expected domestic RevPAR.
“I think the shutdown is going to be more of a local and regional story. I don’t think it will move the needle much nationally,” Freitag noted.
Like Freitag, Bellisario said, it’s “not time to run for the hills. This is a near-term thing that will get resolved over time, and not 100 percent of demand for D.C. area hotels is from the government.”
“What we do know from our research over the years, is that changes in demand for hotels are correlated very closely to changes in employment and income,” said CBRE senior managing director and head of lodging research, R. Mark Woodworth. “Anecdotally, we are hearing from hospitality groups that their business has, in fact, been impacted, which doesn’t surprise us. And the longer a shutdown persists, the more people will engage in a change of behavior: they won’t be traveling and they won’t be doing business.”
The Impact Outside D.C.
Freitag, along with Woodworth, also contemplated the impact that the shutdown is having on lodging based in and around national parks, some of which have had to close as the shutdown prolongs, and some of which remain open, but with limited staffing and services.
“Ground zero has to be D.C. And another one is the national park venues. It’s hard to imagine that the lodging near national parks are not being impacted, even if the magnitude is a bit softened by the time of year,” Woodworth noted.
Reed S. Woodworth, CBRE managing director of public sector management consulting, said, “A lot of lodging in national parks isn’t operation at this time of year, which helps mitigate some of the impact. But those that do have winter operations, like Yellowstone, might see impact over time.”
The Outlook for the Year Ahead
Despite the government shutdown’s impact in markets like D.C. or various national parks, coupled with the economic uncertainty that has rattled Wall Street in recent months, Freitag and CBRE’s Mark Woodworth both anticipate 2019 to be yet another strong year for the hotel industry overall.
“Going into 2019, we were forecasting and we are still forecasting that this will be yet another record year in terms of occupancy for U.S. hotels,” said Woodworth. “We haven’t seen anything yet that makes us feel like we may need to come off of that. The underlying strength of the economy continues to look very good. It might be a bit weaker this year than last year, but last year was a good year. We should continue to see good demand growth.”
Woodworth noted that the most recent U.S. jobs report is another good sign for the hotel industry in the U.S.
“The industry is at peak performance,” said Freitag. “That said, it’s really hard to grow on top of records, which is why the growth rate of RevPAR for 2019 is a step down from what we saw in 2018. In 2018, the year should come in at 3 percent RevPAR growth, and we are expecting 2.4 percent in 2019,” he noted as a preliminary estimate.
“‘Life is good, not great,’ is how I like to characterize the U.S. hotel industry in 2019,” Freitag added, saying the industry’s health will also depend on growth of U.S. gross domestic product (GDP). “All of this is under the headline of ‘as long as GDP growth does what it does’ which is expected to be positive in the 2 percent range.”
For hotel operators and owners like Carrier, however, this government shutdown cannot end soon enough.
“Whenever there is a government shutdown — and this is not the first one by far — there are signs of the economic effect throughout a region that are not always realized,” Carrier said. “The general public probably doesn’t perceive those issues, but we are an economy that functions holistically in this region, and when a part of the economic engine of this region is disrupted, it’s felt pretty significantly by the hospitality business and other businesses.”
He added, “We have great respect for the contractors, and the government communities in this region and we are anxious to see them get back to doing the valuable work they do.”
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Photo Credit: Some Washington, D.C. area hotels are being negatively impacted by the ongoing federal government shutdown. Richard Ricchiardi / Flickr
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