The U.s. Hotel Industry Is Optimistic About The Future But What Comes Next?

Posted: Jan 31, 2018



More conservative folks might talk about being “cautiously optimistic,” but positivity is the prevailing sentiment this year in the hospitality industry. | Deanna Ting

Is the U.S. hotel industry headed for another banner year, or is the end of the cycle drawing near?

Along those lines, executives don’t often speak about their “optimism” at investment conferences, let alone at a hotel event. But that’s exactly the sentiment many of the nearly 3,000 attendees at the annual Americas Lodging Investment Summit expressed about their collective outlook for the industry.

“I don’t think I’ve heard one negative comment,” David Kong, CEO of Best Western said. “Everyone has been talking about the continued strength in our industry. People are still doing deals, a lot of people are optimistic and looking for more to buy, so I think all of that  is very positive.”

Jay Stein, Dream Hotel Group CEO, had a similar experience at this year’s conference, which took place last week in Los Angeles and attracted hotel owners, developers, and executives from real estate investment trusts and the brands themselves. Stein said he spent nearly all of his time in meetings about potential deals.

“This year, I was not part of any of the breakouts or any of the general sessions or anything,” he said. “The only thing I got to hear about what was being said was to read the same blogs that I read when I’m home, so that was a little strange.”

Bill Fortier, senior vice president of development in the Americas for Hilton, said, “… Since 2010, when we’ve come out of the last recession, this has been a steady increase, a steady growth cycle, and it’s really been amazing to see how it’s all going. And now, the economy is growing at three percent, and interest rates are still very low … I’ve never been so accosted by owners.”

Fortier, like Stein and Kong, also found himself in a lot of development deal meetings at the conference. “Last week, [all I heard was] ‘I need a meeting, I need a meeting, I need a meeting.’ The energy here, even before the conference started, has been phenomenal for where we are in the cycle.”

Chad Crandell and Kristie Dickinson, both of CHMWarnick, a national hotel asset management and owner advisory services firm, said noted that the overwhelming sense of optimism was evident despite the fact that it is year eight or nine of the current cycle — something the industry has never experienced in the modern era.

The mood a year ago, a few days after President Donald Trump’s inauguration and just days before he issued his first travel ban, was starkly different. The dominant feeling last year was nervousness, and the outlook for 2017 at the time was not nearly as strong as the current estimates for 2018.

But is the optimism warranted? What happens when the downturn begins? And what kind of downturn will it be?

Despite the optimism, some executives expressed concerns about rate pressures, supply and demand imbalances, and there was even talk of a “bubble.”

REASON FOR OPTIMISM

Rebecca Stone, senior research analyst for Skift Research, said the optimism isn’t misplaced, but the industry should still remain “cautiously optimistic.”

“We recently noted in our 2018 Global Travel Market Outlook report that there is room for optimism this year, as key indicators look quite positive and recession risk, at least near-term, remains low,” Stone said. “However, with the lasting benefits of tax reform uncertain and the Fed likely to raise rates this year, we would caution against becoming overly enthusiastic. Nevertheless, steady, solid growth in 2018 seems to be more than just a possibility.”

Analysts at R.W. Baird, both of whom attended this year’s conference, shared their assessments in an investors note. Michael J. Bellisario and Amanda Sweitzer, wrote, “Fundamental optimism [is] increasing but still somewhat tempered overall. Nearly all of the market participants we spoke with were more optimistic about the fundamental outlook relative to three to six months ago; however, their base case RevPAR [revenue per available room] growth scenarios for the industry are relatively unchanged at 2.5 percent to 3 percent — upside scenarios call for approximately 100 basis points of acceleration on average, which we view as relatively tempered enthusiasm.”

Numbers from 2017 and general economic indicators like gross domestic product and the unemployment rate also generally seem to support the optimism that the hotel industry is currently feeling. The industry, at least in the U.S., saw more demand than expected, partly due to the natural disasters in the fall, and demand continues to break records, according to STR. New supply is also coming in, but rate growth remains sluggish.

REASONS FOR CAUTIOUSNESS

That rate growth is something Stein is paying close attention to, and although he found himself in plenty of meetings, he isn’t as optimistic as the rest of his colleagues.

“I didn’t feel [optimism], but I do think that most people think there’s not a lot of room at the top,” he said. “We may again in our large markets, which a lot of these people here are talking about, but it’s not real exciting. Things are soft. Average daily rate growth is difficult, and in some of the great markets like in New York, the supply has really taken over and the demand, even though it’s strong and still running great occupancies, there’s no strength to drive average daily rate.”

Another reason for cautiousness would be the number of new hotels in progress or under development, as JP Ford, CEO of Lodging Econometrics, pointed out. Referring to Lodging Econometrics’ fourth quarter 2017 report on U.S. construction pipeline trends, Ford noted that while the pipeline is still on an upswing, the pace of it has slowed in the past few quarters.

Current pipeline numbers match what the industry saw in 2007, when the last cycle peaked, Ford said. He added that if the U.S. hotel industry enters another downturn, barring a catastrophic event, the industry would do so but in a much softer way than in 2008-2009.

Offering a similar view, Host Hotels & Resorts’ vice president of strategic insight, Brenna Halliday, said that if another downturn takes place, it wouldn’t be as bad as the last one.

“One of the things that gives me comfort about this potential coming downturn, is that the supply build-up has not been as significant during this cycle,” she said. “We’re about 15 percent below the total supply line we had in 2007. Host is also very well-positioned to take advantage of any future opportunities given our superior balance sheet.”

Another reason some are more cautious than optimistic about the future of the hotel industry has to do with the fact that costs of doing business are rising, especially when it comes to labor.

Tony Capuano, Marriott International executive vice president and global chief development officer, said that cautiousness is bearing fruit for Marriott.

“Given this extraordinarily long cycle, I don’t know exactly where we are,” Capuano said. “We’re probably closer to the end than the beginning. And, if anything, when people start to have any concerns about being in the back half versus the front half of the cycle, that’s their safety net. They say, ‘Gosh, if we ever do get to the point where either things just sort of stabilize, or we get into a bit of a downturn, I want to make sure my hotel is being powered by the strongest revenue engines in the industry, and that I have access to the largest and most powerful loyalty program. So, it sort of moves in inverse direction. But I think it actually becomes easier for us to offer that basket of benefits of affiliation.”

Hilton’s Fortier said that in his conversations with owners, he is also finding that they’re paying attention to supply. “The worry right now, because we’re at the top of the cycle, is impact, because both us and Marriott and IHG, we’ve all been putting a lot of hotels into the pipeline, ever since 2010. And some of the growth in rooms in cities is faster than demand growth in cities, so occupancy is coming down, there’s some rate pressure, and that’s their biggest concern. But I think with the economy now growing a lot faster than anybody thought it would be and with the tax breaks, that must be some of the push from these owners now to say ‘I got to have a meeting with you, we need to get some more deals going.'”

SHOULD THE INDUSTRY BE MORE WORRIED?

Ted Teng, CEO of Leading Hotels of the World isn’t being swept up in the wave of optimism, and he’s concerned the industry is becoming too complacent.

“I would describe last year as a year of great results with anxiety, and in line with this particular conference, we’ve accepted this anxiety as the new normal, which I think is scary, because that’s what puts us into complacency” Teng said. “Even though we got through a year without any incidents, I still think we are in a bubble environment. And I think we have to be somewhat conservative in the way we operate and be prepared for something. You know, I’m naturally paranoid, but I think you need a degree of paranoia because you don’t want to bet the farm every time. You want to make good bets, but never bet the farm. That’s when you get into big trouble.”

He said Leading Hotels of the World’s strategy is to approach this year cautiously. “We’re going to be a little more conservative, you know,” he said. “We see the opportunities, but at the same time I think we have to operate conservatively. We’ll continue to make long-term investments in technology in our organization, our people, but probably be a little bit more conservative for sure.”

And as for the future of the hotel industry in 2018, a lot of its financial success may depend on the impact of U.S. tax reform, said Marriott chief financial officer Leeny Oberg.

“We are in year nine of this recovery,” she said. “And I think the big question is whether all the cash that is going to be coming from the tax reform, and I really mean this relative, mostly, to the U.S., is whether that is going to kick off sustained economic growth or is a little bit of a flash in the pan.”

With so much cash involved, Oberg is taking a wait-and-see approach.

“And it is going to be tremendous amounts of cash and lower tax burden for a large number of American companies,” Oberg said. “But the question is, what happens with that cash? Is it just going to be handed back to shareholders, or is it deployed into things that show economic growth for the country? And from that perspective, obviously, we hope that it is the latter and not the former. So, I think that’s the big question.”

And that’s something we’ll have to wait and see until well after April 15.

 



Go-Wine Sharing and Promotion

Go-Wine's mission is to organize food and beverage information and make it universally accessible and beneficial. These are the benefits of sharing your article in Go-Wine.com

  • It Generates Free Traffic to your site.
  • Your Article Will Get Indexed Faster.
  • Your Google Rankings Will Rise. Google Rise Articles with Positive Participation & Contribution.
  • Your Article Will Reach New Customers and Audience. Go-Wine has a selected audience and visitors from over 120 countries.
  • You always receive credit - you will be cited accurately (Author, Website & Hyperlink).
  • The integrity of the Information is not compromised - you always will be linked to the most up to date version of your article.

Contact Us for more information.

© 2018 Go-Wine©. All Rights Reserved.
Designed by CX Web Design. Vision of Wine Business Academy