By Richard Barkham
Good News for the Business Cycle and the New Economy
Hotel demand has just reached an all-time high in the U.S., according to CBRE Hotels’ Americas Research. Occupancy levels and demand for rooms are also buoyant in Europe and Asia Pacific.1
Demand for hotel rooms is highly sensitive to business conditions, particularly on the downside.
When business revenues and personal incomes are squeezed at the end of the cycle, hotel demand drops away very quickly. Hotel demand has shown strong growth since the middle of 2016, suggesting that business conditions in the U.S., and elsewhere in the world, are robust despite relatively weak GDP growth.
But there is more in these data than a solid cyclical upswing.
A major structural shift is underway as well. We can see this in Figure 1, where the bounce back in hotel demand after the Great Financial Crisis was large and rapid. Figure 2 analyzes this in more depth.
This chart shows the number of hotel rooms sold each quarter in the U.S., divided by the number of people over the age of 16 (my definition of the working-age population). I make this adjustment because the working age population has increased by 38% since 1988, some 70 million people, and I would expect the number of hotel rooms to expand over time, just to accommodate this cohort.
So, what are the key takeaways?
- The number of hotel rooms sold is increasing at a rapid rate, even after controlling for the growth in the working-age population. And, as noted above, it is now at an all-time high.
- This growth in demand is taking place at the same time as non-hotel lodging is being supplied into the marketplace by online platforms such as Airbnb. Airbnb only accounts for 5% of total hotel rooms sold in the U.S., but when we add it to the hotel total, and express it as a ratio of the working-age population, the true scale of the structural shift becomes clear.
Why is hotel and non-hotel lodging in such high demand?
- The business cycle is more robust than the GDP numbers suggest. Government statisticians can’t quite keep track of the increasingly important virtual economy; and, the current recovery, which drives demand for hotel rooms, is stronger than we think. I give this three out of five as an explanation.
- Demographic change is boosting demand for experiences over physical goods. Older consumers spend a higher proportion of their income on health, education, recreation and leisure. Since 2000, the population of the U.S. over the age of 45 has increased by 45%. Millennials, too, have a high propensity to travel.2 I give this four out of five.
- Hotels are getting better at delivering a great experience at whatever price point consumers choose. Four out of five.
- Online platforms such as Priceline, Expedia, Kayak, Trivago, Hotels.com, etc. have made the process of booking hotels incomparably easier, and consumer reviews have increased the transparency of the marketplace. I give this five out of five.
- Budget airlines have revolutionized global travel. It is now possible to circumnavigate the globe with budget flights for $1,620. Legacy carriers (i.e., non-budget airlines) would charge $3,877.3 Five out of five.
What are the implications for real estate?
- Activity in the hotel sector suggests economic growth is both solid and improving: Investors can take confidence in real estate fundamentals more broadly;
- The new economy is outpacing the old. Retailers have not had such a good recovery as the hotel sector, but they are in the same marketplace for consumers’ discretionary spend. They need to do more on service, offer and experience at every price point to regain market share.
As an afterthought, let’s not forget that the hotel sector in most of the developed world depends to a much greater extent than other industries on migrant labor. If the flow of migrants is diminished, it is not at all clear that the jobs would be taken up by native-born workers; it’s more likely the growth of this highly vibrant sector would be constrained. That would be a shame.
1STR, Inc., Hotel Review Report, August 2017. 2Vicki Gelfeld, American Association of Retired Persons, 2017 Travel Trends presentation, November 2016. 3Wall Street Journal, Budget Airline Ambitions Remake Global Travel, August 24, 2017.
