HB ON THE SCENE: At ALIS, 2019 outlook was more positive than 2020

LOS ANGELES—With the tagline of “Investing: Today, Tomorrow and Beyond,” more than 3,000 delegates gathered at the Americas Lodging Investment Summit (ALIS) to network, make deals and discuss 2019 and the near-term future. The hotel industry has high hopes for 2019, just like it did for 2018, though 2020 isn’t as positive of a forecast. Hotel Business got a hold of some attendees and speakers to take the pulse of the industry regarding expectations for the future.

“While domestic lodging industry fundamentals remain firm (i.e., supply and demand growth remain in sync), elevated levels of political and economic uncertainty, and early signs of a softening of consumer confidence, portend a heightened potential for an economic slowdown during the second half of 2019,” said Mark Woodworth, senior managing director and head of lodging research for CBRE Hotels. “While the potential for the former is somewhat higher today, the likelihood of the latter remains distant.”

In 2019, according to CBRE’s research, which Woodworth presented at the annual conference, supply is expected to increase by 1.9%; demand is forecast to increase by 1.9%; occupancy is projected to remain flat; RevPAR is forecast to increase by 2.3%; and ADR is expected to increase by 2.3%.

Hilton CEO Chris Nassetta (right) and Goldman Sachs CEO David Solomon talk about the economic outlook.

“CEOs are telling us that the geopolitical uncertainty and new threats born out of the current administration’s economic policies will influence 2019 results, not all positively,” said Scott Berman, principal at PwC. “In the short term, there is even more uncertainty created by the month-long government shutdown. Nonetheless, the U.S. remains a top target for inbound investment and, in turn, PwC believes the long-term prospects for the U.S. lodging industry are generally good.”

Despite ongoing indecisiveness resulting from gridlock in Washington, the new year is starting off well. “Overall, we are off to a good start in 2019 and projects are looking positive, mindful that every market is different,” said Rick Takach, chairman and CEO of Vesta Hospitality. “Because of the government shutdown, we are staying abreast of markets where federal workers and contractors are significant demand drivers. We also expect increased supply in 2019 to be in line with increased demand, but that is also a market-specific relationship. For example, a major market like New York is actually now coming back into balance, having absorbed a lot of new supply.” Even though there’s a wariness about 2020, hotel executives aren’t concerned at all with the potential outcome of this year.

“Going forward, we will be watchful of the next election season and the natural cautions prompted by this extremely long favorable industry cycle,” he said. “However, right now, economic indicators are still strong, reflected in the fact that developers and the brands continue to bring new product to market.”

Some management companies are budgeting for increased RevPAR. “On an aggregate basis, we are budgeting a 4-5% increase in RevPAR for our managed properties,” said David Hale, VP of business development at Paramount Hotel Group. “That percentage increase is skewed on the high side due to some distressed assignments we took on in 2018 and the expected double digital increases in the budget for 2019. Putting aside the anomalies, we would say 3% is a reasonable increase for 2019. Strong local sales and taking advantage of all yield opportunities are critical to achieving those expectations.”

Many hospitality executives expect the hotel industry’s growth from 2018 to continue into this year. “It has always been our style to look toward the future but to never forget the past,” said Justin Jabara, VP of development at Meyer Jabara Hotels. “We feel that there continues to be a lot of opportunity out there. 2018 was one of the best years for the company, and 2019 is pacing to be just as good, if not better. That being said, we are long overdue for cyclical change to the economy.

“Growth has slowed, and costs continue to grow,” he continued. “As an owner and operator, we need to find new ways to keep our margins. This comes from revenue but also costs. As a developer, we need to assess the positioning of our portfolio. This could include the selling of an asset, renovation or repositioning. In all, we are excited for 2019, but given what history has taught us in the past, we are more cautious than we were in 2018 and 2017.”

Construction companies also see the new year as a year of opportunity. “At R.D. Olson Construction, we are very optimistic about the next 12 months and see 2019 as a year of growth both for ground-up construction and renovations,” said Bill Wilhelm, president of R.D. Olson Construction. “As a result, we are anticipating a 5-6% increase in our employee count during the second quarter of 2019, a strong indication of our growth and extensive pipeline of projects.”

There’s still some industry concern. “In our experience, most developers are bullish, but cautious, for 2019 and beyond,” he said. “Most still recognize there is a real need for the right product in the right geographic location. While in some areas full- or select-service might be the right fit, others have a need for extended-stay offerings. As long as experienced developers ensure that projects are an ideal fit for the specific market, there is still quite a bit of opportunity out there.”

The Women’s Leadership Forum panelists discuss the future of the hospitality industry.

Other developers and owners aren’t as positive with their outlooks. “We’re seeing early signs that developers and owners are starting to feel pressure—the rise in Certificate of Occupancy sales definitely indicates a decreased appetite for risk—but we don’t anticipate a metric fall, barring any major events,” said Andrew Coleman, senior managing director at Berkadia Hotels & Hospitality. “And, in fact, the debt markets remain very strong for hotel assets. Historically, we’re usually the first sector out of the financing market, but debt remains relatively inexpensive, which is helping to sustain the cycle. It’s pretty simple—if investors can continue to borrow long-term money at a lower cost, they’ll continue to transact.”

Hotel groups are bullish on the year ahead. “While I wish we could, we are not able to predict the future,” said Paul Sacco, EVP and president of global development at RLH Corp. “We continue to see a strong pipeline and anticipate that continuing through 2019. We see no signs of the pipeline slowing down and are continuing to drive the momentum forward. However, should the economy slow, RLH Corp. is set up to continue to do well and grow. With our brand options, we can accommodate hotels that are leaving other brands or chains that have higher fees and stricter PIPs/requirements. Our lower fees and flexibility make us a great choice during a downturn in the economy.”

A portfolio with various chain scales can protect these hotel companies against potential downtowns in the future. “The future is bright for Wyndham Hotels & Resorts,” said Geoff Ballotti, president and CEO of Wyndham Hotels & Resorts. “Our broad portfolio, ranging from economy to luxury, is strategically designed to offer a wide range of compelling experiences and price points for guests and deliver the best value to our franchisees, developers and partners. This means we can offer the right option for every guest and owner/developer during any economic climate.”

As for transactions, there may not be as many in 2019 as there were in 2018. “I expect to see fewer transactions in 2019 as the impact of rising interest rates are felt by the market (HVS has already hinted at lower values in 2019),” said Amanda Chivers, managing principal at Crown Hospitality Consulting. “Lenders are cautious, and we may see signs of a pull back, at least until the second quarter is underway and there’s more clarity about the market trajectory. If lodging demand holds steady in Q1, 2019 may pick up in Q2 and Q3 and mimic 2018 overall (i.e., concern but not real signs of market distress).”

While the outlook for 2019 is positive, many are expecting a slowdown in 2020. “Looking 18-24 months out, we are taking somewhat of a more cautious approach to projects, particularly in our vetting process with customers with whom we don’t have a long relationship,” Wilhelm said. “It’s important to us that our partners are proven companies with substantial experience navigating the opportunities and challenges of hospitality projects.”

More than 3,000 industry professionals attended ALIS.

In 2020, supply is expected to increase by 1.9%; demand is forecast to increase by 1.7%; occupancy is projected to decrease by 0.2%; RevPAR is forecast to increase by 1.9%; and ADR is expected to increase by 2.2, according to CBRE’s research.

“With respect to 2020, forecasting future growth in today’s geopolitical environment is quite difficult,” Hale said. “Among others, when will the tariff war end with China and what will be the resolve for Brexit? These and other variables can continue to lead a solid economy off the rails. Notwithstanding those factors, we believe that as long as supply increases remain moderate and inflation is kept in check, we can expect 2020 to also show RevPAR growth, albeit at a slower pace. Those markets impacted by openings of multiple hotels will likely see declines as demand will likely not keep pace.”

Transactions are also expected to slow down in 2020. “As such, we are focused on securing short- and long-term bookings and developing relationships that are fruitful as you head into the slowdown,” Chivers said. “[We are focused on] layering group business to maximize revenues, offering incentives for multi-year contracts, and ensuring our guests and meeting planners are not only happy but eager to return. We are looking at expenses, too, and working with the brands to take advantage of technology and better negotiated rates with partners and vendors.”

Also potentially impacting hotels in 2020—the election.

“We do think 2020 may have volatility due to the elections,” said Mark Ricketts, president and COO of McNeill Hotels. “Because of the power of our brands (Marriott and Hilton) and our varied geographic locations, we believe that we will be able to mitigate any downturn if it transpires.” HB

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