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Shifting Fundamentals

Forecasters Point To Supply, Lack Of Pricing Power As Leading Concerns Going Forward

Friday, November 01, 2019
Dennis Nessler
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A statistical snapshot of the industry recently provided a tempered outlook as a handful of forecasters pointed to factors such as increasing supply, weakening pricing power and a slowing in transactions as key indicators moving forward into 2020.

Vail Ross, SVP, global business development & marketing, STR, meanwhile, offered some insight on the rest of 2019 during the recent Lodging Conference. Ross noted STR is forecasting 1.6 percent RevPAR growth for the year with the majority of that coming from 1.4 percent ADR growth. Ross also noted supply growth for the year is projected to be 1.9 percent with demand growing at 2.1 percent.

“We’re still in that environment where supply is not outpacing demand growth, which will lend some small growth of occupancy at .2 percent. That story will change as we move into 2020 where we will see that tipping point of the supply and demand relationship,” she said.

Ross elaborated on the increase in supply noting that there are currently 207,000 rooms under construction. “That is up 10 percent from where we were this time last year and it’s only 4,000 away from where we were in the peak of 2007. We’ve opened a little more than 690 hotels year-to-date and that represents a little more than 77,000 rooms,” she stated.

JP Ford, SVP and director of global business development, Lodging Econometrics, reinforced the point as he detailed projected openings for the year.
“We’re expecting to open a little over 119,700 rooms, which will represent a 2.2 growth rate of new supply for 2019 and there’s much more ahead in 2020 and 2021,” he noted.

Mark Woodworth, senior managing director, head of lodging research, CBRE, also detailed the impact of increased supply.
“One of the things that is in fact impeding ADR growth is the supply change we’re seeing in a number of markets. In 25 of the 60 [top markets] we’re calling for an average supply growth of 3.9 percent. In the markets where you see supply growth less than that you see meaningful RevPAR gains,” he said.

Ross provided some other STR projections, including demand dropping to 1.6 percent in 2020 resulting in RevPAR growth of 1.1 percent. Occupancies are forecast to come in at 0.2 percent for this year and -0.3 percent for 2020, according to STR.

Woodworth offered additional detail on what CBRE sees in leading U.S. markets. “In terms of occupancies they remain very elevated and we think they’re going to be sustained. They’ll bounce up and down a little bit, but not very much. Pricing power remains weak and there’s really nothing on our radar screen that makes us think that’s going to change materially anytime soon,” he said, adding he expects RevPAR growth to remain on a “very even keel with not a lot of ups or downs.”

Meanwhile, the direction has clearly been down when it comes to transactions.
“For the first half of 2019 total transactions are way off the 2018 pace. It’s not likely we’re going to reach 775 [number of deals in 2018]. In fact, we’re likely to fall far short of that number,” said Ford.

Adam Lair, managing director, senior partner, HVS, elaborated on the slowing deal market. “This time last year we were seeing a little bit of a recovery in transaction volume so 2018 was actually up. We were seeing more buyers than sellers come to the table and we were seeing more transactions move through the market. This year we’re down pretty significantly,” he commented.

Lair explained that transaction volume is down 8 percent overall, which is a result of a 2 percent decline for limited-service assets and a 10 percent drop for full-service assets. He added the economic uncertainty has been a contributing factor, as well as changing investor attitudes, in the decline in deal activity.

“These investors--such as larger ownership groups and more institutional types-- with shorter horizons are being a lot more conservative in their underwriting this year, but they’re sticking to their guns on their equity return requirements. Couple that with the fact that we’re seeing sellers demand peak pricing still at this point in the cycle and that’s where we get a little bit of the dislocation that we have in the transaction market,” he noted.

Lair acknowledged the softening of the lodging market as he took a look ahead.
“So the question going forward for us in 2020 and 2021 is if we continue to see slower RevPAR growth and more robust expense growth do investors start to adjust their return requirements? Or do we start to see a little bit of a correction in pricing to meet those higher returns?” he asked.

Ross did provide some positive news as well pointing out that through August the industry has reached historic highs in terms of rooms sold with some 870 million.

“We have got 1.3 billion rooms currently available to sell year-to-date and the good news is that we’re selling them. So while we’re always talking about a little bit of a slowdown if we look at the sheer amount of rooms our industry has to sell and the amount we’re selling we are hitting all-time highs,” she said, adding that overall room revenue year-to-date is roughly $115 billion representing a 3.2 percent increase from last year.

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Dennis Nessler    Dennis Nessler
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