Growth in the North American hotel market may shift, but shows no signs of fading anytime soon
How long can the RevPAR roll? That is the question hoteliers and travel managers have been asking as the lodging industry enters its eighth year of increases in the standard measurement of revenue per available room. And according to analysts and insiders, the answer is this: the good times, with perhaps a bit of moderation, will keep on rolling.
It has indeed been a heady time for hospitality. Jan Freitag, senior vice president, lodging insights for STR, the industry statisticians, says 2016 was a record year for hospitality in the US when more rooms were sold for more revenue than ever. “We are 85 months into RevPAR growth,” says Jan Freitag; “we are not seeing huge growth rates but growth nonetheless.” This year, says Freitag, supply will grow by about 2 percent while demand will grow by 1.7 percent which means a small shrinkage in occupancy. He predicts the rate will probably increase 2.8 percent this year and probably rise by a similar amount in the year to come.“
That rate increase is pretty low compared to the 2013-2015 period,” says Freitag, “which should be of interest to travel managers because their budgets might not be able to handle any higher of an increase.”
The hotel industry tends to follow the overall economy and, says Freitag, “We think the GDP will be OK, so we see healthy demand, more supply and some price increases.” Overall, he sees “continued RevPAR growth, continued demand growth and some rate growth.”
Other analysts agree. Mark Woodworth, senior managing director of CBRE Hotels’ Americas Research (CBRE), says, “If we look back at the traditional things that brought an end to the good times there was usually something going on within the economy, some kind of economic contraction. Today, we are in a period of what I call ‘certain uncertainty,’ but there are no deep concerns of a negative nature in the US. Also, I recently spoke in Canada and the mood there was very upbeat. They are feeling very good from both the economic and hotel perspectives that this year will be better than 2016, partly because there are fewer concerns about oil and energy, which is very important in Canada.”
It is still a seller’s market across the US and Canada, “partly because the energy sector has bounced back a bit, which is important for Canada as well as for certain cities in the US,” says Suzanne Neufang, vice president, Americas for HRS, the hotel booking portal.“
The North American hotel market continues to evolve,” notes Phyllis Nakano, director of vendor relations for Balboa Travel. “For example, based on the 2017 Advito forecast, it is projected that we will see a 3-4 percent increase on rates in North America overall. The big change is in hotel brands with the Marriott acquisition of Starwood. We have also seen a rise in limited service hotels like Hyatt Place, Courtyard and Hilton Garden Inn as they grow their coverage and are no longer limited to the suburban and/or rural areas they once were. There are more limited service brands entering big cities in the US and Canada where full service hotels once dominated the market,” Nakano explains.“We are in overtime in this cycle, which is tense and exciting at the same time,” says Ron Pohl, COO for Best Western. “The US and Canadian hotel cycle follows the stock market, which has remained strong and therefore builds consumer and business confidence. As long as there isn’t a correction or the start of a perceived continual decline in the stock market over time, business and leisure travel will continue at the current steady pace. Hotels will continue to be developed as long as demand remains strong and interest rates remain reasonable.”
At Best Western, Pohl says, “Our development pipeline is as strong as ever and corporate and leisure business is pacing well. We had a strong first quarter and expect a strong summer season. Gas prices remain low which always supports leisure travel. Finally, oil and coal markets have improved slightly.”
Michelle Simmons, corporate director, travel industry and business travel sales for Omni Hotels & Resorts, says, “Business travel is starting a turnaround in the US and Canada. We’re seeing pick-up in markets previously in a slump, as well as industries such as energy and finance.”
Where The Growth Is The hotel growth story lies in two categories: by price in the upper midscale and upscale hotels limited service; and, geographically, in secondary and tertiary cities as some large markets are already overbuilt with hotels. The new supply story, says Freitag, “is all about upscale and upper midscale hotels. That means travel managers will see a lot more competition in those price points – which is good for travelers, who get good beds, complimentary WiFi and a good breakfast.”
Carol Lynch, Wyndham Hotel Group’s vice president of global sales, the Americas, says, “Secondary and tertiary markets are poied to pop. We’re seeing an increased interest in new construction hotels in markets just outside of big cities, where there’s urban appeal but lower land costs. This type of market is ideal for extended stay or for guests looking for tranquility for meetings and conferences but still want to be near the city for excursions and easy transportation such as Dulles airport and Cincinnati.”
And what markets might still be ripe for development? “The Midwest is our next frontier,” says Lynch, “with a whole host of areas that are booming like Cincinnati, Cleveland and Detroit; and it will continue to grow because they haven’t been inundated with supply like other markets.”
Challenging MarketsSome markets remain difficult for travel managers because of stubbornly high rates and occupancy. “We continue to see rates rising in certain markets which continue to be a challenge due to under-supply and continuously high demand,” says Nakano. “For example, Silicon Valley is still the most challenging market in North America due to lack of supply and a limited number of new projects planned or announced.”
Elsewhere in California, the typically strong San Francisco market finds itself temporarily in an atypical low-demand situation because the Moscone Center is undergoing major renovations, resulting in partial closings into 2018; that has pushed group demand elsewhere. On the other hand, says Neufang, “While large trade show events are on hiatus in San Francisco, there is strong demand from smaller groups which has sometimes made it just as hard or harder to find rooms.
As a result, San Francisco remains strong, as does Nashville.”As a result of the strength of some of these US cities, says Freitag, “it might be worthwhile to look at Canadian cities like Toronto and Vancouver.”
Which Markets Are Softer? Oversupply and local issues like energy prices have resulted in challenges for hoteliers in certain markets. For example, Nakano notes, “We have seen rate decreases in markets like Baltimore and Houston. In addition, travel into North America is already down and continues to stay down due to political uncertainty and immigration policies in the US which leads companies to hold back on inbound travel to the US.”
Woodworth advises, “Occupancies will be going down in a handful of markets, including Austin, Charlotte, Houston, Miami and New York. Pricing power on the sellers’ side won’t be quite as good and we may even see a rate decrease in some cases. New York will see another year of significant new supply. While the city can absorb a lot of rooms, rates in real terms are roughly 25 percent below the peak levels of 2007.”
Mike Schugt, president of Teneo Hospitality group, which works with hotels to find meetings groups, agrees. “Certain markets, like New York, are weak because of the strength of the dollar and Brexit,” he says.
And, of course, disruption is having an impact on lodging companies. As Pohl says, “Major markets continue to be impacted by disruptors such as Airbnb, which affect rates and overflow to surrounding hotels and suburbs.”
Canada has not had as robust a hotel market as the US in recent years but signs are positive. According to CBRE Hotels research, business travel is expected to increase in that country by 2.4 percent in 2017 and rates are expected to increase from $149 to $154 in 2017. Meanwhile, supply is up only 1.5 percent in 2017 while demand will be up 2.4 percent.“
Canada is alive and well,” says Neufang, “with Toronto, Montreal and Vancouver seeing healthy growth. Chains are less important here and there are more independents to choose from, which could be helpful to travel managers.”
Certain Uncertainty As always, especially in this period of “certain uncertainty,” outside forces will have an effect on the hotel outlook. “The price of oil is still having a great effect on many of our markets – and based on conversations with oil and gas travel managers, it will still be a while before we see it come back,” says Lynch. “They are starting to see travel demand in some tertiary markets (not very consistently) and in areas with very limited room inventory. Ironically, at the moment, we’re not seeing politics influencing the decisions for North American travel buyers much.”
Nevertheless, the political uncertainty around travel remains a factor, says Neufang. “There will continue to be some interesting politics, like the idea of banning devices of work in flights from certain regions. That may have impact but we don’t know how much. Inbound traffic is a worry because of the federal travel bans.”
And says Pohl, “Political concerns could arise that may impact consumer confidence and spark an economic downturn such as whether or not the repeal of the Affordable Healthcare Act will stall, whether or not tax reform will pass, or if a federal budget is adopted.”
Observers do have tips for managers in what continues to be a seller’s market overall. They include:
Multi-year deals and limited service hotels. “Ask for multi-year deals; implement or expand use of limited service properties versus full service hotels,” says Nakano. “These strategies don’t work for all markets or for all hotel chains but could help to maximize the hotel program ROI where they do.”
Flexibility. “Flexibility is key,” advises Schugt. “Sometimes even moving a meeting by a day can make a difference in the rate.”
Policy enforcement. “Managers can protect negotiated rates with hotels by limiting providers to drive share and mandating travel programs in their organizations,” Lynch explains. “We’ve seen managers have major success in promoting the hotel partner’s loyalty program internally to inspire travelers to book with that hotel brand.”
Rethinking days of the week. “While seasonal patterns have been consistent, there has been a shift in lodging performance by day of the week,” says Woodworth. “In 2016, weekend occupancy averaged 71.3 percent, while weekday occupancy was 62.3 percent. This indicates that there is room to accommodate new corporate and group demand, and the outlook for the economic indicators that drive these market segments is quite positive for the next few years.”
Dynamic pricing. “The more open travel managers are to strategic pricing, the more opportunities for savings,” says Simmons. “There is a negative perception regarding dynamic pricing with managers believing hotels are simply going to raise rates; however, if our industry as a whole did that, we would all lose business. As long as we have open dialogues with managers and understand each other’s wants/needs it becomes a win-win.”
In the lodging industry, good times inevitably bring more supply. According to Lodging Econometrics, which tracks the hotel pipeline, a total of 1,080 hotels with 121,508 rooms will open in 2017, a 22 percent increase over 2016, with another 1,283 hotels to open in 2018.
Still, analysts think the demand will absorb those additions. “There don’t seem to be any bubbles in sight,” says Schugt. “We will continue at a slow pace of growth. People are still buying and selling hotels, which is an indication of the industry’s health. We have low inflation, low interest rates and low unemployment.”
In fact, industry growth should persist through 2018 and likely beyond, predicted Woodworth. “After so many quarters of record breaking performance, plus all the new supply, labor and geo-political challenges, it is not surprising that some are leery of the future. However, when you take a hard look at the data and scrutinize issues like seasonality, locational variances and weekday/weekend demand patterns, you can see where there is still upside potential.”