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Hotels are celebrating record highs while keeping a cautious eye to the future

Dec 02, 2016
by Jeff Loy
Digital Editor



Attendees at Omni Hotels & Resorts’ “Be Collaborative” professional development series in Frisco, Texas, on Wednesday were given an inside, analytical look at the challenges some planners face due to the booming success of the hotel industry and why the future of that industry is very much up in the air.

Carter Wilson, vice president, consulting and analytics for data benchmarking firm STR, kicked off the program’s first education session, explaining that hotels are almost at a crossroads.  

“It’s important to know what’s happening in the [hotel] industry and the industry’s at a really interesting time right now,” he said. “There are a lot of people who think that the industry is doomed and that’s simply because the industry is at all-time highs right now.”

Wilson pointed out that some in the hotel industry expect a crash after reaching peaks in statistics such as revenue per available room (RevPAR) and said that the industry as a whole does not react well to uncertainty.

“When the hotel industry is headed in any kind of direction, either positive or negative, that’s okay,” he said. “But it’s when hoteliers just don’t know what’s going to happen that things tend to get a little bit skittish.”

When planners enter negotiations with hotels, though, Wilson said that it’s important to keep in mind that the numbers are currently on the hotel industry’s side. He pointed out that records are still being broken, with occupancy rates through October at over 65 percent and RevPAR currently sitting at an all-time high.

“More people stayed at hotels in July than ever in the history of the hotel industry in the U.S.,” he said. “This is why it’s hard for you to find rooms for your groups.”

Hotels also have the upper hand in negotiations is because the average daily rate (ADR) and RevPAR have never been higher, even when adjusting for inflation, Wilson said. Profits are also reaching higher levels.

“Really that’s what it boils down to for hotels is the profitability,” he explained. “Even adjusting for inflation, the average hotel’s profit in 2015 is nearly as high as it was when all-time records were set in 2000.”

 

The number of hotel rooms being added to the market won’t be the problem some people think it might be, but other factors could hit the industry financially.

“There’s a lot of talk about how new supply is going to be devastating and apparently Omni is accounting for the new supply in the country,” said Wilson, drawing laughter from the audience while referring to the preceding presentation about the three new hotels the company is building and renovations to other properties. “New supply is not a huge concern. It depends on the market that you’re in, but in general it’s not that big of a deal.”

He noted that in the late 1990s, there was a period when the hotel industry suffered somewhat due to overbuilding. The other decreases for demand in the industry, though, were affected by factors other than construction (the savings and loan crisis in the 1980s, 9/11 in 2001 and the economic downturn in 2008-2009). Wilson noted that supply and demand numbers are beginning to move closer together, though, and at some point hotels will begin to see occupancy loses.

He said that a number of economic conditions are currently very positive, and are benefitting the hotel industry. Unemployment numbers are low, while personal income and spending growth are contributing to increased travel. And record stock market levels that are sustaining consumer confidence.

While these factors are giving hoteliers confidence, Wilson referenced his previous comments about issues making them skittish.

Traffic is beginning to slow down, according to recent data and earnings calls, with occupancy for the U.S. down in the last month and rates only slightly rising at 2 percent. There are also other factors that could be giving the industry pause.

“What I said earlier: Uncertainty is not something the hospitality deals well with,” Wilson said. “We don’t know the impact of Trump’s election on the hotel industry. We’ve interviewed different corporate [hotel industry] CEOs and we’ve gotten different reactions from them…they’re just saying, ‘Overall we’re not really sure what this means.’”

Wilson said that could in interpreted as companies holding things in place until they see what kind of policies are put into effect by the new presidential administration.

Researching hotel demand 12 months before and after an election, Wilson said his company didn’t see any major changes in the results. He said they then looked at the larger picture of when there was an administration change.

“What I think we’ve learned is that a president essentially inherits whatever hotel economy was already in place when they were elected,” he explained. “But again, this doesn’t speak to actual implementation of certain policies that could affect the travel industry. So again, it’s going back to that uncertainty.”

Other uncontrollable factors such as labor costs, the Zika virus, the price of oil in energy dependent markets and an increasing number of ways of booking hotel rooms that could be affecting rate growth are also contributing to the uncertainty.

In a forecast produced by STR, Wilson said they see a slight increase in supply and slight drops in demand, occupancy, ADR and RevPAR. While these aren’t the positive numbers the hotel industry has been seeing, Wilson doesn’t think a major crash should be expected.

“I just think there’s nothing that indicates that the hotel industry is headed for a crash,” he said. “It’s usually some kind of an event that causes a catastrophic crash in the hotel industry. There’s nothing on the horizon that indicates anything like that is happening. But right now we think it’s going to be much more of a controlled landing rather than a crash.”