2017 Hospitality Outlook Is A Mixed Bag

The 2017 outlook for U.S. hotels offers mixed blessings, with near record occupancy levels projected while average daily room rates (ADR) are expected to continue leveling off. According to the recently released December 2016 Hotel Horizons® forecast report, CBRE Hotels’ Americas Research is projecting that the U.S. lodging industry will achieve annual occupancy rates of 65.3 percent in 2016 and 65.0 percent in 2017. Both of these marks are just shy of the 65.4 percent all-time record occupancy level posted in 2015.

“Conventional wisdom says that at such high occupancy levels, hoteliers should have the leverage to implement strong price increases. However, like for much of 2016, you need to throw conventional wisdom out the window,” said R. Mark Woodworth, senior managing director of CBRE Hotels’ Americas Research. Despite the lofty occupancy levels, CBRE is forecasting a national ADR increase of 3.3 percent in 2017. While this represents a real ADR change of 1.7 percent, the pace of ADR growth has been falling since 2014 and is expected to continue to weaken through 2019.

“Of course, movements in ADR do vary by location and chain-scale. The northern California markets of Sacramento and Oakland, along with Washington, D.C. and Tampa, are projected to lead the nation and enjoy ADR gains in excess of six percent during 2017. Further, lower-priced independent properties, which have lagged in their recovery, are starting to see some meaningful increases in room rate,” Woodworth added.

CBRE attributes the overall sluggishness in ADR growth to a combination of factors, some of which are new to the U.S. lodging industry:

  • In an effort to draw business from third-party intermediaries, the major brands are aggressively promoting consumers to book direct on the chain’s website with guaranteed “best available rates”
  • Increased competition from the sharing economy
  • Weekend leisure travelers now comprise a larger portion of total lodging demand – these guests tend to be more price-sensitive

“Complicating matters in 2016 was the elevated level of economic and political uncertainty felt by the business community and consumers. Without knowing the outcome of the election, the direction of the Fed with regards to interest rates and the growing strength of the dollar, we sensed that companies and individuals held back on their commitments to spend more on meetings and travel,” Woodworth observed.

REASONS FOR OPTIMISM

While the prospect for raising room rates may be disappointing for hotel owners and operators, the outlook for lodging demand growth is positive. “If you look at the recent economic indicators, you see increases in retail sales, auto sales, building materials and health and beauty products,” said John B. (Jack) Corgel, Ph.D., professor of real estate at the Cornell University School of Hotel Administration and senior advisor to CBRE Hotels’ Americas Research. “In short, people are spending on themselves, and that bodes well for travel.”

“We always remind clients that the performance of a hotel is closely tied to the health of the local economy. I see a great deal of public and private developments occurring around the country, and even more might take place if spending for infrastructure projects is approved by Congress. Hotel managers should identify areas in their communities where this development activity is occurring, and they will find new sources of demand,” Corgel advised.

COST CHALLENGES

As the economy improves and unemployment levels drop, hotel managers will continue to struggle to control their largest operating expense – labor costs. “In recent years, hotel managers have had to deal with rising salaries, wages and benefits, as well as increased staffing levels needed to serve the record levels of occupancy– a trend we do not see dissipating in the near future,” Woodworth noted. “Further, inflation, while still relatively low, is most likely on an upward trajectory. Eventually this will impact the other goods and services purchased by hotels.”

“This is where the inability to raise prices begins to hurt hoteliers. Management is unable to match the rising cost of operations with commensurate increases in room rates. This puts a significant strain on the ability to continue to achieve the levels of profit growth observed the past four or five years,” Corgel added.

FLAT – THE NEW NORM

Slight declines in occupancy, combined with minimal real gains in ADR, is the pattern CBRE foresees through 2020. “Lodging is a cyclical business, and we continue to see U.S. hotels sit on top of the peak of the cycle after recovering from the Great Recession. We are encouraged by the positive outlook for lodging demand and resulting high levels of occupancy. While flat performance sounds disappointing, the strong underpinnings supporting continued growth in travel will prevent an outright fall from the peak,” Woodworth concluded.

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