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Inside The Numbers

Leading Research Firms Detail Factors That Could Impact Industry Growth In 2020

Friday, February 07, 2020
Dennis Nessler
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The inability to drive rate, declining profitability, the spread of the Corona virus and the ongoing impact of home sharing were among the top concerns for a trio of research firm executives who discussed the near-term future of the lodging industry at last week’s ALIS conference.

Speaking in a session entitled “The Numbers – What To Expect In 2020 & Beyond?” the executives included Cindy Estis Green, CEO and co-founder, Kalibri Labs; Amanda Hite, president, STR; and Mark Woodworth, senior managing director, CBRE Hotels Research.

The panelists addressed a few immediate challenges for the coming year.
According to Hite, “One of the [top concerns] for owners and operators is profit growth or the ability to maintain profit margins in this sort of environment. I think that’s going to be a real challenge in 2020 and a real heated debate between operators and owners about the best way to do that.”

Estis Green emphasized owners need to adjust how they think about performance. “We’re still in an analog mindset and we’re operating in a digital world. We have to think what is different in a digital world and what is it that we have to change in that mindset. You can’t think about top-line revenue anymore you have to only think about profit contribution in terms of getting that revenue,” she insisted.

Estis Green added, “when you look at your business you have to understand not just your RevPAR but the composition of it.”

Woodworth, meanwhile, voiced concern about the deadly Coronavirus suggesting that there have likely been more infected and more deaths than have initially been reported out of China.

“This is not intended to scare anybody but this is potentially something that could really cause a right-hand turn in the road, depending upon the depth of how bad this thing is. We have seen from the ZIKA virus and other things in our past that they can have a very quick and sizable negative impact. The good news is historically it has not persisted that long. I would want to know from my managers, if in fact, the worst thing happens what are you going to do about it? At least have a plan in place,” he commented.

The inability for the lodging industry to drive rate, particularly in recent months, continues to be a key issue to watch. STR has projected ADR growth to be less than 1 in the coming year and Hite noted even that may be optimistic.

“I probably have an unpopular view in the room, but I think the risk is there’s a good chance that the rate growth is less than we’re forecasting for 2020. There’s just not enough out there to say that hoteliers are going to have anything different this year that’s going to allow for any more meaningful rate growth,” she exclaimed.

Estis Green attributed the pricing issue to a number of factors, including transparency in the market with regards to the Internet and OTAs, which can drive down rate.

“The other thing is hotels tend to have a fairly static mix and they’re not investing in the higher value channels at a rate that’s greater than they have in the past. So they tend to kind of go after the same mix year after year not realizing that they may have to change out the mix. In addition, hotels have a tendency to look around at each other and try to match rates and it can cause a race to the bottom,” she said, adding “you have to run your own race.”

Hite added, “Especially when you look at the top 25 markets, supply certainly is impacting the ability to grow rates. That’s not just hotel supply but that’s also short-term rentals. We’ve got a lot of flexible supply in lodging today that was not there several years ago. We see it in the compression nights. In the U.S. in 2019 we had 140 less compression nights where occupancy was 95 percent or higher than we had in 2018.”

Woodworth underscored the point noting that the percentage of short-term rental units has increased in many markets.

“In an aggregate [top U.S. markets] there are 10 to 11 percent short-term rental units as compared to traditional hotel rooms, but there are some markets like New York where that number is 20 percent. So part of the strategy in incorporating all this data and so forth is making sure you understand everybody your competing with and how they’re priced,” he noted.

The panelists went on to elaborate on the potential impact of home sharing on the traditional lodging industry.

“It’s a kind of supply that’s here to stay. It’ll evolve and it’s just going to change the profile of the lodging industry and become another type of accommodation that we’re going to get used to having,” said Estis Green.

According to Hite, “It’s going to be interesting to watch as we get into even more uncertainty to see what happens. Their business model will change in the end and that’s something to be mindful of.”

Woodworth, conversely, sees is it a positive.
“It’s helping more people to travel away from home so that net net is probably a good thing for our industry,” he said.

Uncertainty in the market, particularly as it relates to geopolitical issues, is something to be mindful of as well, according to the group.

Estis Green noted that also leads to cutting rates.
“There’s Iran, Russian election interference, an election year, there’s just a lot going on. I think the tendency to want to cut rates when there is uncertainty is strong and that is not healthy and good” she noted.

Woodworth agreed. “One of the things we look at closely is the Economic Policy Uncertainty Index, and not surprising to anybody the highest spike we’ve seen in quite a number of years happened in November of 2016 [election]. We had two spikes in 2019 that rivaled that. If you look at our forecast I would put a negative bias on that because of that uncertainly in the marketplace,” he asserted.

“If you’re looking for a positive though consumer confidence is still there and that will drive the demand growth that we’re going to see this year. The one thing that I would want to see that is not there yet is an increase in capital investment from corporate. If we start to see that flowing in 2020 then we can have a more positive outlook for rate,” concluded Hite.

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Dennis Nessler    Dennis Nessler
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