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U.S. Lodging Industry Overview – Q2 2016

by Elaine Sahlins, MAI, CRE, Managing Director, Valuation & Advisory

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Outlook for 2016 and Other Considerations

As of mid-September 2016, STR recently revised their forecast of nationwide average rate growth downward from of 4.0 percent to 3.2 in 2016, which is below the 2015 growth of 4.0 percent. As the national average rate growth in the first half of 2016 was 3.2 percent, STR is anticipating consistent rate growth for the remainder of the year. In 2017, the ADR growth is projected to moderate to 3.1 percent. Travel slowdowns in the first half of the year are challenging demand while new hotel construction is pushing the supply part of the equation higher. Supply is forecast to increase 1.6 percent in 2016 and 2.0 percent in 2017, with the overwhelming majority of new rooms opening in the limited-and select-service sectors.

The national occupancy level is forecast to be flat in 2016, and hence, RevPAR growth is anticipated to be based on the average rate growth of 3.2 percent. With occupancy levels remaining at stable levels, operators continue to maintain pricing power and average rates should continue to increase. In 2017, the STR forecast an actual decline in occupancy and a lower ADR of 3.1 percent and RevPAR growth of 2.8 percent. The forecast for 2017 is now below inflation, reflecting the industry’s slowing fundamentals. Nevertheless, if realized, this expected growth will again set record RevPARs.

Airbnb

With the slowdown in the market performance and the underlying global concerns, other industry influences are becoming more pronounced. Noteworthy among the “disrupters” is Airbnb. The company started eight years ago, and was coined part of the “sharing” economy, now more accurately referred to as the “rental” economy, and it is big business. According to Phocuswright, several estimates put Airbnb’s 2015 gross bookings at approximately $7.5 billion (some are as high as $9 billion, Happy mature mother meets son with his wife at doorwaywhile the low end of one model is a little more than $6 billion) and nearly one in three U.S. travelers stayed in some form of private accommodation in 2015, up from about one in ten in 2011. In the U.S., most of the Airbnb demand was reported in five cities: New York, Los Angeles, San Francisco, Miami and Boston. Competition from Airbnb is growing in Oakland and Oahu.

In July 2016, Airbnb announced it will partner with three travel management companies (American Express Global Business Travel, BCD Travel and Cason Wagonlit Travel). Travelers will book on the Airbnb site and the reservation data will be available on the guest’s corporate travel site.

Hotels are on the offensive with new design and service programs. Seeking to capture the local experience and ambience that travelers now pursue, hotels are offering room service from local restaurants, recommendations and routes to local cultural events and facilities, and are heavily marketing their non-guestroom facilities to local residents through social media. On an institutional level, industry associations are pursuing greater regulation of health and safety standards and compliance with local tax requirements for non-hotel lodging. In many urban areas, other pro-renter groups are also challenging the short-term rental companies as a threat to markets which are already struggling with rental housing shortages. Airbnb continues to seek new formats for its growth and is aggressively expanding into urban planning and development. The company is building a small housing development in Yoshino, Japan, that will double as a community center and a tourism hub. Airbnb users will be able to book rooms on the second floor of the lodging development, and the lower levels will serve as a community center for visitors and local residents. With this evolution, Airbnb is solidifying its participation as part of the hotel industry.

Booking Wars

The battle for guest acquisition and retention heated up in 2016. Impacted by the high cost of commissions from online travel agencies (OTAs), reportedly averaging 25 percent of the room rate, many hotel companies are campaigning to capture a higher proportion of reservations directly on their corporate reservation systems. The battle is escalating as the online vendors consolidate. Expedia acquired Travelocity and Orbitz in 2015 and the Airbnb competitor, Homeaway, in 2016. Its online brands also include Hotels.com, Trivago and Hotwire. Expedia’s rival Priceline also owns a number of brands including Booking.com, Kayak, Agoda, and Opentable. Priceline’s inventory is also available on Tripadvisor.

Man working at laptop computer

Online travel agents captured about 15 percent of U.S. net bookings in 2015, up from 11 percent in 2010, according to market researcher Kalibri Labs LLC. About 19 percent of bookings are made through hotels’ own websites and apps. The rest come from corporate travel agents, group bookers and offline channels. Outside the U.S., where independent hotels dominate, online travel websites make up an even bigger share of the business. In 2016, hotel companies including Marriott, Choice, Hilton, Hyatt, Wyndham and Intercontinental Hotel Group responded with marketing programs that offer loyalty program members discounts ranging from 7.0 percent to 25.0 percent off best available rates. Hotel companies are optimistic these initiatives will route hotel guests directly to websites and provide other marketing opportunities.

Travel to and in the U.S.

According to the U.S. Travel Association, with 77.5 million international visitations, the U.S. is the single largest destination for global long-haul travel, and the second-largest destination for overall global travel.

Our border neighbors are the largest contributors of inbound international travel to the US. Canada is the biggest source of overseas visitors to the U.S., followed by Mexico. South Africans are the highest travel spenders when visiting the US, and India has the highest share of travel, accounting for 25 percent of its U.S. exports.

Despite a small uptick in June, the U.S. Travel Association’s Travel Trends Index (TTI) predicted muted international inbound travel growth for the remainder of 2016, due in part to the fallout from Britain’s decision to leave the European Union. International inbound travel had been stagnant for months, with variables such as the strong U.S. dollar weighing on travel from previously robust markets like Canada. International inbound travel growth in June somewhat defied expectations as the summer travel season began in earnest, outpacing domestic travel for the first time in 13 months.

Jet plane stand on ground

Declining fuel prices continue to challenge the economy of the “energy” markets but low gas prices supported stronger summer travel, particularly to “drive-to” destination markets throughout the U.S.

Overseas economies continue to be challenged. China’s slowing economy remains a concern. The effect of the unfolding of the UK Brexit vote on U.S. travel is unclear.

And finally, hoteliers are monitoring immigration, visa policies, minimum wage and health care costs as these impact operating costs and discretionary income in this labor-intensive industry.

Zika

On July 29, Florida reported the first cases of Zika virus infections likely caused by bites of local mosquitoes in the continental U.S. The Centers for Disease Control and Prevention (CDC) has issued a notice to women who are pregnant or thinking of becoming pregnant to avoid unnecessary travel to the impacted area that is just north of downtown Miami. This is the first time the CDC has warned people not to travel to an American neighborhood for fear of catching an infectious disease.

The U.S. Travel Association continues to monitor recent developments regarding the Zika virus. The World Health Organization has publicly cautioned against instituting travel or trade bans in response to the Zika virus, even as the organization declared the outbreak to be a public health emergency.

The effect on tourism to South Florida, however, which attracted 106 million travelers worldwide in 2015 according to Visit Florida, remains yet to be seen. The outbreak has caused Public Health England to update the risk level to “moderate” for U.K. travelers to Florida, who numbered 1.7 million in 2015 according to the Inbound Report.

Long security lines at airports

Image of a persons hand holding a passportAfter hours-long lines at some airports and public outrage over stranded passengers, the Federal Security Agency (FSA) reorganized their processes between Memorial Day and the Fourth of July, dramatically reducing wait times even as summer air travel surged to record levels. Funding for newer technology was contributed by several airlines. Additional lanes were open at major airports with bigger x-ray bins and automated return of the bins. These strategies are contributing to faster processing of passengers.

Conclusion

The hotel industry has enjoyed a period of robust growth and record breaking performance over the last six years, but the most recent trends point to a shift in the cycle. The expected change in the pace of the performance is starting to materialize, and new supply is now a reality in many markets.

Macro-economic impacts, such as a potential interest rate hike as recently anticipated by Janet Yellen, the Chairwoman of the Federal Reserve, and the outcome of the 2016 elections, are also on the minds of investors and travel planners. Despite the uncertainty, many investors and lenders are seeking opportunities even as the cautious environment is limiting transactions. The industry is carefully monitoring the performance and transaction volume for the remainder of the year.

Download the full U.S. Lodging Industry Overview for Q2 2016.

 

Sahlins_Elaine_AMER_Jun2015Elaine Sahlins, MAI, CRE is a Managing Director in the Hospitality & Gaming practice of Cushman & Wakefield where she provides appraisal and consulting services for hotels and casinos. With over 25 years of experience, Ms. Sahlins has performed valuations and market and feasibility studies of hotel and gaming properties throughout the United States relating to financing, feasibility and other real estate issues.

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