Executive Summary
2016 is looking to continue the trend line of 2015 albeit with a somewhat muted feel. While average daily rate growth (ADR) will be a solid 4.5 percent, occupancy levels look to remain relatively flat, up just one half of one percent with demand outpacing supply 2.2 percent to 1.7 percent according to Lodging Econometrics and STR respectively, so this translates to a 5 percent growth in revenue per available room (RevPAR). Coupled with capital availability and the analytics and trends discussed below, this will be an active and exciting year.
Because all the headwinds we expect in 2017 will not have fully materialized, we will still have the most profitable year ever in our industry. We’re not foreseeing a recession as we’ve experienced in past economic downturns, but more of a soft landing in 2017 as the economy pulls back slightly. There are a multitude of factors that will impact our industry and lead to this soft landing in our opinion. While there has been a dramatic collapse in oil and other commodity prices, the U.S. economy has returned to fairly full employment (i.e., the unemployment rate is currently at 4.9 percent and still in a downward trend), inflation risks remain low and the Fed is not sure if they are lowering or raising interest rates and 2016 is an election year—this will be another great year.
U.S. Economy and Impact on Hospitality 2016 and 2017
With 2016 being an election year in the U.S., the impacts of new economic policies will only start to be noticeable in 2017. Further, the Institute of Supply Management shows continued growth of the economy and projects a 1.8 percent growth in Gross Domestic Product. This is consistent with The Economic Outlook Group forecast of a continued 2 percent or more growth in GDP.
After a period of growth and prosperity, the ever present threat of new supply will rear its head, though it will be less impactful than it could have been as banks continue to maintain rigid standards for lending. With forecasted occupancies remaining flat in most markets this year, as new supply enters the market we will see a supply/demand imbalance beginning in 2017 in many markets even if demand keeps pace with 2016 levels.
UBS is forecasting a reduction of capacity utilization for 2016. They are estimating 76.9 percent, down from 78.3 percent previously; UBS reports that every 1 percentage point of capacity utilization is about 20 basis points of RevPAR growth. Expectations of a higher unemployment rate, now at 4.9 percent and up from 4.6 percent previously, will also have a negative impact on the lodging industry, according to UBS.
As these factors start to weigh on the industry we will notice an even bigger impact from OTAs and the sharing economy. The American Hotel & Lodging Association warned earlier in 2015 that the now completed merger of Expedia and Orbitz would create a duopoly controlling 95 percent of the market. The sharing economy (mainly Airbnb), discussed thoroughly in our March newsletter, has yet to really impact the hospitality industry as most of the impact has been during extremely high demand periods. As the economic pullback sets in and the OTAs reclaim lost market share, we will start to see a noticeable impact from the likes of Airbnb as guests get more comfortable with the platform and use it to seek out quality and affordable options.
Fallout from minimum wage increases and changes to overtime laws for salaried workers will begin to be noticeable in 2017. EBITDA (formerly referred to in our industry as Net Operating Income or NOI) will be impacted as minimum wage increases take effect over the next few years. Health care cost increases are another contributing factor to our soft landing in 2017. Further, the industry has been growing RevPAR on the plus side for 67 months so it should not be a surprise if that trend is in jeopardy at the end of this year as we will have grown RevPAR for nearly 80 months.
Trends in 2016
Analytics is taking a front seat with executives clamoring for data as everything is trackable now. We are able to see how much attention a certain ad campaign is getting as well as the geographic location of the users interacting with it, their age and a general idea on their income. Mobile data science companies take things a step further. They can provide incredibly specific attributes about buyers by their mobile identification numbers (MIN). These attributes include car type, job type, office size, net worth and political affiliation. The amount of information available to us today is almost scary. But therein also is the problem, there is so much data that we need to be able to sift through it and discern what is actually useful to grow our business. Data collection is one thing but data analysis is the key.
Digital marketing continues to be dominated by two words: mobile and video. The average user consumes more than 65 minutes of live mobile video a day and this number is growing fast. Millennials look at streaming video the same way past generations viewed television. With Facebook Live finally emerging into the market, the future of knowledge and culture remains in digital, though that should never have been in question. Further, guests are using social media outlets, community apps, and online forums not only to research and book hotels, but to gauge the hotel’s brand identity. Increasingly this is being done on mobile devices.
The Marriott acquisition of Starwood as well as the 11th hour disruptive bid from Anbong and the Expedia acquisition of Orbitz are harbingers of a consolidation coming in the hotel industry. While it is too soon to determine what other brands or companies will decide to come together, it is clear that we are entering the age of consolidation as the economy enters the mature stage.
Soft Branding has hit full stride this year with the recent addition of several major “soft brands” like Hilton’s Curio and Canopy, Marriott’s Autograph and Moxy, Choice’s Ascend, Best Western Premiere, Hyatt’s new Unbound Collection and many more including original soft brands Leading Hotels of the World and Preferred. While some of the aforementioned are priced pretty high relative to hard brands, they are very often more flexible in terms of design and standards of operation as well as contract term.
Adhering to the science of hospitality, revenue management is a constant work in progress that is now 40 years old but evolving at warp speed. Take a hard look at who is the most profitable customer and what room types are in highest demand each and every day and make certain your team is accurately forecasting demand. Revenue management has always created pricing strategies based on the forecasting of demand. While still in widespread use and often considered state of the art, forecast-based pricing can miss opportunities to maximize long-term customer value as it focuses on short-term revenue gains. By failing to differentiate which customers are coming at which price, this pricing strategy/tactic may reduce the optimization of your loyalty program or worse. Monitoring your online review scores more closely and factoring them into your decision-making, coupled with monitoring your regrets and denials will also allow you to price more effectively.
According to the 2015 MMGY Global Portrait of American Travelers®, “47 percent of millennial travelers reported that their travel destinations represent “who they are,” compared with only 34 percent of Gen Xers and 34 percent of baby boomers. Customers are increasingly demanding that travel enrich their lives, and be driven by exposure to unique experiences and integration with local atmospheres, as opposed to travel driven by a singular product (e.g., individual hotel or attraction) within a destination.”
Corporate Strategy
No matter how hard some people may fight it, Airbnb, Uber, and the likes are here to stay. Hotels should innovate and provide quality alternatives with the same appeal to the maximum extent possible. Mobile/digital check-in, easily accessible and plentiful outlets in all areas, and reliable and fast wi-fi are some of the amenities desired by those who utilize Airbnb and HomeAway. The hotel industry should not take its cues from the music and taxi industries that could not embrace change and continue to implode. More disruption is on the way!
Taking an agile approach to the market involves the creation of a viable value proposition and an ability to optimize your relationships and assets to enter the “new normal” of a soft landing. This allows you to build a sustainable model and develop communication channels, many of which are new to this decade.
According to Ernst & Young (EY), “over the past decade, the value proposition within hospitality has evolved from a pure product play (e.g., hotel room, management service) to an experiential proposition, offering a customized level of service and information demanded by stakeholders. Whether your objective is to achieve growth through scale, capture market share or fulfill unmet customer demand, dynamically developing and refining your business plan — with key stakeholders in mind — remains crucial to achieving success.”
Capital Flow
According to Real Capital analytics, “cross-border capital flow from Asia into global lodging markets is anticipated to continue to increase. In 2015, overseas capital accounted for 35 percent of global hotel investments, with Asian investors representing approximately 33 percent of these transactions. Asia’s sovereign wealth funds and insurance companies, particularly those from China, have invested heavily in high-profile assets in gateway cities. China remained the most active Asian hotel buyer in 2015, accounting for 44.7 percent of total invested capital from Asia, followed by Singapore at 16.7 percent and South Korea at 15.6.” As Daniel Lesser, President and CEO of LW Hospitality Advisors indicated recently, “the U.S. is the safest place on the planet to park money.”
Destination Marketing Organizations
In 2015, destination marketing organizations (DMOs), entities that promote places for tourism, employed a number of strategies to deliver consistent experiences across tourism products, using the power of social media analysis and leveraging the resources of the sharing economy. Given the success many DMOs have had with these strategies, public and private tourism stakeholders including economic development agencies, governing bodies and hotel owners and operators are taking notice and increasingly empowering DMOs to enhance a destination’s value proposition.
Globally, shared lodging and transportation have in many ways disrupted traditional operating models. As a result, many DMOs are partnering with technology providers to improve the access, experience and affordability of their products and services. Examples include Mexico City, San Francisco and Philadelphia, which have actively promoted usage of sharing economy companies to increase transportation capacity in areas with limited public transit and to increase lodging supply during peak visitation periods. Further, DMOs who receive an increased stream of promotional dollars via a Tourism Marketing District (TMD) have an opportunity to significantly shift market share. San Diego is the best large city example as their TMD was wiped out by a crazy mayor in 2013 and reinstated one year later. The results showed a remarkable return of demand.
Technology
Technology continues to play an ever-increasing role in the hospitality sector. It is making a difference from the front of the house to the back of the house. In fact, hospitality and leisure sector leaders cited technology as one of their businesses’ top organic growth strategies in EY’s November 2015 Global Capital Confidence Barometer survey, and for a good reason: opportunities for growth may exist across many aspects of the product life cycle. In the year ahead, hospitality players should expect further technological advancements to loyalty programs and revenue management strategies (RMS) and greater adoption of the Internet of Things (IoT).
The opportunities afforded by IoT is on the horizon as hospitality companies adopt this network of everyday physical objects or “things” that contain electronics, sensors and network connectivity that allows them to collect and exchange data. These objects can communicate with each other, increase operational efficiency and enhance the guest experience at the same time. This will allow a number of time-consuming processes to be automated. For example, new smart refrigerators will reorder depleted stock, adjust the temperature as required and notify staff if any parts are not functioning properly. Similarly, a guest’s hotel room preferences regarding lighting, temperature and favorite snacks will be recorded to provide a more personalized experience.
We are so bullish on technology being a change agent for hospitality that we constantly look at technology partners to assist us in developing an app that will meet our current and future customer demand. We believe that owning the customer is paramount to our ability to control distribution costs and clearly, independent operators are vulnerable to OTA costs and must fend for themselves. Further, we must use technology to increase our ability to provide a safe and secure environment for our guests and team members. The Erin Andrews verdict tells us we must be extraordinarily vigilant and have protocols and security innovations in place that prepare us against cybercrime and terrorism as well as protection against bad boys.
2015 Final Industry Statistics – U.S. and Selected Markets Forecast and Values
Occupancy levels finished 2015 at 65.6 percent, up from 64.4 percent in 2014, an increase of 1.7 percent. Average rates finished at $120.01, up from $114.92, an increase of 4.4 percent and RevPAR finished at $78.67, up from $74.04, an increase of 6.3 percent.
We believe 2016 will provide growth of 0.5 percent in occupancy to just under 66 percent with average rates climbing to $125.50, up 4.5 percent and RevPAR growing to $77.75, an increase of 5 percent. According to STR, one of the healthiest segments is luxury. The pipeline of new construction in that segment is under 5 percent of the over 140,000 rooms under construction.
Hotel values may have peaked nationally as REITs are not actively purchasing since their stocks declined and the runway provided by 2013-2015 is shorter. However, values may not decline this year. Private equity is in abundance, 2016 still has a positive, election year outlook and foreign capital continues to find the U.S. lodging industry to be attractive.
In San Diego, where we operate 9 hotels, we saw occupancy finish at 76.4 percent, up from 74.6 percent in 2014, an increase of 2.4 percent. Average rates grew to $150.73, up 6.1 percent from $142.12 and RevPAR grew from $105.98 to $115.11, up 8.6 percent from 2014 to 2015. Values will continue to increase due to limited new supply, barriers to entry, strong group and leisure demand and the potential for a convention center expansion downtown.
In Phoenix, where we operate 5 hotels, we saw occupancy finish at 65.9 percent, up 4.4 percent from 63.1 percent, average rates up to $121.09, up 8 percent from $112.14 and RevPAR at $79.77, up 12.8 percent from $70.74. Yes, the Super Bowl blew up Q1 2015 numbers so the comps to date in 2016 will not provide a fair comparison, but Phoenix will finish with occupancy up to 67 percent, average rate up to $125 and RevPAR up to $84, up 5 percent from 2015 even considering the difficult comps from the Super Bowl year.
Though we are coming to the end of our current economic cycle, it does not mean we are entering a recession. We are currently still forecasting 1-2 percent growth for 2017, but as hoteliers we need to prepare ahead of time for this pullback after several years of fantastic growth. Invest in upgrading your product while profits are strong and interest rates are low so you can keep up with the new supply as we enter this soft landing. With the current geopolitical threats around the world, any unforeseen event could tilt this soft landing toward a more difficult economic environment. Stay ahead of the curve the best you can and arm yourself with the tools and talent you need to succeed in a softer economy. That is a good plan regardless of what happens. Good luck in 2016, it will be a great year so enjoy it!
(Click the link for my Detailed San Diego Forecast.)
