All Signs Point to End of Upcycle for U.S. Hotels

With U.S. RevPAR (revenue per available room) growth grinding to a near halt this year, it appears that the hotel industry's record 116-month upcycle might be coming to an end.

Hotel data firm STR, in partnership with Tourism Economics, released its final forecast for the year in mid-November, downgrading its RevPAR projections to 0.8% growth for 2019 and 0.5% growth for 2020. Previously, STR had forecast that U.S. hotel RevPAR would increase 1.6% and 1.1% for 2019 and 2020, respectively.

STR president Amanda Hite said, "U.S. hotels have posted nine straight years with RevPAR increases of basically 3% or higher, so growth levels below 1% will clearly represent the industry's worst years since the recession."

Other 2019 metrics paint a similarly dour picture. STR estimates that U.S. hotel occupancy will be down 0.2% this year, though average daily rate (ADR) will grow 1%.

Supply is expected to slightly outpace demand, with the former up 2% and the latter expanding by 1.8%.

For 2020, U.S. occupancy is projected to fall 0.4%, concurrent with a 0.9% increase in ADR. Supply is expected to grow 2% and demand 1.5%.

Like STR, CBRE has delivered a relatively tepid outlook for the coming year, with CBRE Hotels Americas Research senior managing director and head of lodging research Mark Woodworth predicting that "2020 will be another year of OK but not great" performance.

"For the first time in a decade, supply growth should outpace the increase in demand, and the national occupancy level will experience a slight decline," Woodworth said. "Also, 2019 will be the first of a three-year run of sub-1% annual RevPAR change. This underscores the expected reality that increases on the bottom line are likely to be the exception and not the rule."

Woodworth added that broader economic uncertainty, which he said has led to "a fragile approach to revenue management," is likely to persist well into the third quarter of next year.

Bjorn Hanson, an industry consultant and adjunct professor at New York University's Tisch Center, similarly attributed some of the weak RevPAR performance to current revenue-management strategies.

"The question is, if occupancy has been at its highest since 1981, how can we have a situation where ADR is only increasing at half the rate of inflation?" Hanson said. "And part of that may be because it's hard to find a hotel nowadays that doesn't have a revenue manager. 

"But is revenue management, as an industrywide practice, helping or hurting? Some analysts will blame the internet, which makes it very easy for consumers to compare prices and find low rates, but it's the industry that's setting those rates."

Equally concerning is the fact that labor costs, real estate taxes and insurance and other overhead expenses are growing at a rapid rate.

Jan Freitag, STR's senior vice president of lodging insights, said, "We're now in this weird environment where our costs are going to continue to go up, but room rates are falling behind."

Freitag added that the cost/ADR situation will end up one of two ways: "Either hotels will try to drive other revenue outside the room rate, like [food and beverage] or spa, etc., or their profitability will likely be hit."

Kevin Kopelman, a managing director and research analyst covering hotels and online travel at Cowen, said he believes that the booming short-term vacation-rental market could also shoulder some blame for the lodging industry's recent woes. Cowen estimated that for 2019, Airbnb's U.S. business will expand by $1.25 billion year over year.

"In addition to the weaker macro trends, we're also calling out the fact that investors are significantly underestimating the impact Airbnb is having," Kopelman said. "We don't think the impact of Airbnb is necessarily accelerating, but it's growing, and it's highly cannibalistic to hotel industry RevPAR."

Moreover, short-term vacation rentals could be having notable impacts in some of the largest U.S. metro markets. According to STR, RevPAR in the country's top 25 markets in aggregate is expected to have dipped 0.5% in 2019, with Seattle (minus-4.1%) and New York (minus-3.5%) seeing the steepest declines.

"Airbnb does have an outsized presence in those top urban markets," Kopelman said. "And some of those markets are also going to see less international inbound travel due to a strong U.S. dollar as well as feel the effects of slower business travel."

Major metro areas like Seattle and New York could also be on the verge of oversupply. According to J.P. Ford, senior vice president and director of business development for Lodging Econometrics, recent spikes in hotel openings could be putting some pressure on RevPAR in select markets.

"If you take Seattle, for instance, you had 14 new hotels with 3,325 rooms open last year, which represents a room growth rate of 7.3%," Ford said. "That's a pretty healthy dose of new supply. So I'm not surprised to hear about a squeeze on RevPAR happening there."

In fact, he said, "Just based on the strength of the U.S. pipeline alone, you can probably expect that other top markets may have some similar oversupply concerns."

Meanwhile, with myriad other headwinds at play, whether or not it's time to stop calling the industry's current run an "upcycle" appears to be up for debate.

STR's Freitag said, "We've now seen two RevPAR declines in 2019 two months in a row [August and September]. On one hand, we're not predicting annual RevPAR will actually decline; we're expecting RevPAR growth as long as GDP growth continues.

"But on the other hand, it may be time to face reality and accept that monthly RevPAR growth is going to be slightly positive or slightly negative, and going forward, it's going to be really hard to continue to call this an upcycle."