What’s happening in hotel supply and demand has buyers scrambling amid quickly changing markets
Reading the tea leaves from the pot of numbers boiling through the latest hotel revenue forecasts, times look bright indeed – if you happen to be a hotelier. Stronger-than-ever increases in occupancy levels and revenue per available room (RevPAR) are strong and holding, and there seems to be a willing public ready to pay the gains. But a deeper view into the future of hotel growth and supply reveals trends that may make some hospitality companies uncomfortable and send travel procurement departments scrambling.
There is no doubt the hospitality industry is in the midst of boom times. The US lodging industry will achieve 65 percent occupancy in 2015, the highest national occupancy rate since STR, Inc. began reporting this data in 1987. By the end of this year, PKF-HR Consulting predicts demand for lodging accommodations will have increased 25.8 percent since the depths of the recession in 2009.
Meanwhile, the supply of hotel rooms will have grown by just 5.6 percent. Hotels have been opening up room after room in the upscale and luxury category while mid-scale hotel development has been scaling back. A quick glance at an empty teacup reveals a future in which oversupply in the upper tiers could bring price drops while an undersupply in economy lodging categories could bring price spikes as slowing supply tries to manage rising demand.
“The domestic economy in 2015 is better than it was in 2014 and 2016 will be better than this year. The domestic numbers are not great. It’s been one of the weakest recoveries on record. But the lodging industry was one of the fastest and strongest to recover. Record numbers of hotel rooms have been introduced into the market,” says Mark Woodworth, president of PKF Hospitality Research.
“What we learned from this episode is that the pieces moving the needle for hotels are driven by corporate spending and profits, and consumer spending,” Woodworth notes. “And both of those categories are rapidly expanding.”
In 2015, RevPAR growth will be achieved by healthy increases in both occupancy and ADR (average daily rate), similar to a pattern the industry has seen since 2011. A recent note in the PKF’s Hotel Horizons March 2015 report adds that beginning in 2016, ADR gains are expected to be the dominant – if not sole – driver of RevPAR growth through 2019.
Benchmarking the Boom YearsThe 1990s are considered the benchmark years for comparison. These years were the only other time we observed such a sustained confluence of positive economic and market conditions for the lodging industry, Woodworth says. But then he asks the question that keeps researchers scratching their heads. Sustained numbers or not, is the lodging industry in the peak of this RevPAR cycle?
His answer is a definitive, “yes.”
“From a fundamental perspective it is the midpoint. Growth for the next two to four years is quite positive, although not pronounced as in the past. The acceleration of new supply will continue the slowing of RevPAR. But also contributing is that normal economic response as price goes up and demand goes down,” says Woodworth.
That would be good news for corporate travel mega-buyers, such as Carlson Wagonlit, which is trying to map where the savings are and straining to find them in these halcyon days for hotel companies.
“It is definitely a difficult environment,” says Eric Jongeling, director, CWT Hotel Solutions Group. “What we are seeing over these last four or five years is the upscale tiers of hotels growing at a much faster pace in ADR than other mid or upper-mid types of hotels. But starting last year, mid-scale properties saw ADR increases shoot above the upper scale and luxury properties. We have seen that trend reverse where growth is due to lack of supply but now it almost seems as if hotels are chasing ADR.”
Jongeling admits that strategies have had to change. “Share shifting that used to mean shifting share from upscale to midscale, would now be more focused on properties and deals than category. Conversations are shifting to value, even if rooms are in the same tier. Before it was always about moving down a tier – what is my potential and what savings can I realize. Now it is moving from, say, a Courtyard to Doubletree and seeing what I can realize in savings.”
Fairfield inn & Suites, a mid-scale brand in the Marriott family and serving mostly secondary and tertiary locations, tries to attract buyers with added amenities that will be appreciated, whether by the casual leisure guest or the business traveler. Fairfield provides a list of amenities to meet a promise for helping travelers keep balance in their lives. Those include free hot breakfasts with healthy food options and fitness centers at the properties.
“Regarding upper mid-scale categories – consumer expectations have been rising in this tier as product and amenity offerings have improved over the last five years,” says Shruti Buckley, vice president and global brand manager of the Fairfield Inn & Suites brand. “We compete by providing quality amenities and strong guest service and problem resolution services. We find these are things are driving satisfaction with all guests.”
Other companies, such as the InterContinental Hotel Group, have sliced up the categories with new lifestyle brands that can add value or style to stays within similar lodging categories. Well known for its mid-scale and extended stay brands – Holiday Inn Hotels and Resorts, Holiday Inn Express and Candlewood Suites – IHG recently introduced EVEN Hotels to its list and also has Hotel Indigo. Both of these brands appeal to the emerging demands of Millennials and to the interests of business travelers looking for a more chic and urban experience without the burden of upscale pricing. Considered more boutique than budget, corporate pricing is not always favorable, but buyers are not cutting them out of the loop.
“The value of amenities is always part of the questioning we do – what is breakfast really worth to my travelers? And where will it be possible to realize the best savings and rates?” says Jongeling. “We are also looking closely at new properties that are coming into a given market and seeing opportunities for partnering, especially if established partners are not playing nicely in the sandbox.”
Lifestyle properties are part of that strategy and gaining, he adds, and mostly because of the steep demographic shift in business travelers the industry is seeing. “It’s part of the overall conversation about the changes going on. And with the large segment of Millennial travelers coming into this market we are seeing better opportunities for creating the right price points with these properties.”
Supply Side EconomicsSTR, Inc. cites a spike in hotel room releases this year: 33.7 percent to 33,391 rooms over January 2014 among chain scale segments. Luxury tiers follow with a 32.2 percent increase to 10,106 rooms. The Economy segment, however, reported the largest decrease in the number of rooms under contract – down 9.1 percent to 4,043 rooms. There are currently 438,957 rooms under contract in the United States.
2009 saw the introduction of some 109,000 new rooms across the categories, just in time for the recession that washed the industry in a glut of inventory and a tumbling ADR. At that time, the group buyers and corporate buyers partnered with these properties to help keep them afloat through the tough times – an era that mega-buyers, such as CWT, hope hoteliers will remember through these boom years.
While inventory has evened out and new building moves through the pipeline, some cities are becoming less affordable than others for housing the rising demand of corporate travel. New York City, surprisingly, is seeing rates flatten after welcoming an influx of 4,348 rooms this year (adding to the existing count of 108,592 rooms) while 14,272 more rooms are currently under construction. Meanwhile, San Francisco, which did not partake in the hotel room development party, is seeing double digit increases in ADR and RevPAR and a hotel supply climate – boosted by Silicon Valley – that cannot keep up with demand.
“It’s really difficult to say whether oversupply will meet desired pricing. So much of this conversation is location based,” says Jongeling. “In New York City we’re seeing rates as low as I can ever remember in the increases that are being discussed. But in San Francisco with the high demand and low supply, rate negotiations are not happening. San Francisco is our toughest challenge right now.”
New York, Austin and Pittsburgh are currently forecast to experience the greatest increases in room supply and the three lowest levels of RevPAR gains for the year.
“There is no doubt we are seeing an increased number of room types in hotels,” says Cynthia Armitage, senior consulting manager, Global Business Consulting, American Express Global Business Travel. “The sophisticated yield management systems in which hotels are engaged, and hotels limiting inventory to maximize revenue will be making negotiations of contract rates more comprehensive over the next few years. Group business is trending up, which will put pressure on the transient business. Corporate customers will need deeper insights into the availability of their negotiated rates and how pressure on supply/demand is affecting travel costs.”
The New NormalCWT’s Jongeling concurs with this assessment; he believes that possessing more geo-local knowledge about the cities in question, and knowing the conditions that play in those locations, will go a long way in adding ammunition to any negotiation to obtain lower rates. He cautions that travel managers and managing corporate executives have unreal expectations as to what these markets really are.
“It’s not like ordering pencils where you can look at past prices, adjust for inflation or circumstance, and come up with a price.” Jongeling uses New York as a real-life example of how understanding the specific conditions of a location make a big difference.
“We were going into last season’s hotel program, and expectations were around 8 to 9 percent in projected growth in New York City. Then we saw it was more at 3 to 4 percent or half of that, and then down the line it was flat. In Los Angeles we saw expectations of 3 to 4 percent in rate growth but then last year it was closer to 8 percent so our expectations going in were completely different than the reality we saw when we started negotiations,” he notes.
“This is the new normal – changes are happening too quickly. But only two things can happen: Supply catches up to demand or demand reduces.”
With ADRs so high, discussions of cowboy entrants into the market, such as Airbnb, are not uncommon. Although these discussions do not come up as serious topics most of the time, in some cities, such as New York, Austin and Los Angeles, many believe room supply in all categories, and especially at the budget and mid-scale tiers, could see some relief as the online home/room rental company becomes more viable as other than Millennials adopt its use. In 18 major urban markets Airbnb already accounts for more than 5 percent of the room supply.
“At some point a room is a room is a room,” adds PKF’s Woodworth. “On Airbnb you rent any room you can imagine. But we have done enough research to know that the presence of Airbnb does affect pricing in particular markets. There is more supply and the consumer has a better choice as a result. Do we think it will go away? Doubt it. Is the playing field level? No.”
Nonetheless, he advises, this will not be the New Normal forever. “Eventually the playing field will be level, and therefore Airbnb will count. For now it is something to watch.”