The U.S. lodging industry is expected to continue to grow room rates and RevPAR in 2018, while occupancies—hovering near record highs in many chain scales—remain roughly flat. That’s good news, especially for hoteliers expecting to see new competitive supply this year in their respective marketplace.
Experts told Hotel Business that with little room to push occupancies much further in many chain scales, hoteliers will largely focus on driving ADR in 2018. It’s a testament to the industry’s healthy current supply and demand equilibrium, which remains favorable on the demand side even in segments where there is significant new supply.
“We have a hard time expecting any downside to our outlook, since the increase in supply relative to how much we think demand is likely to grow going forward for the next two or three years is a very balanced relationship,” said Mark Woodworth, senior managing director of CBRE Hotels’ Americas Research. “We don’t see a lot of movement on the occupancy side, and that’s particularly important; we are operating at record levels today. There’s not a lot of shifting up or down going forward, because it’s just a very balanced change in new-construction and openings relative to how we see demand growing.”
Given that state of balance, industry experts see far more opportunity this year for increasing rates and RevPAR, instead of occupancy. CBRE is expecting occupancy growth to remain flat at 65.9% overall, ADR growth of 2.5% to $129.94 and RevPAR growth of 2.5%, to $85.59. STR is projecting similar numbers for the segment, with a year-end 2018 occupancy decline of -0.2%, ADR growth of 2.4% and a RevPAR increase of 2.2%. Sources at STR, however, explained the firm’s projections may be somewhat conservative at the moment.
“It’s looking like it’s going to be a pretty good year, maybe similar to this year,” said Bobby Bowers, SVP of operations for STR. “Right now, we’re forecasting RevPAR to be about 2% or so, which is a little bit below where we think we’ll wind up in 2017, but I think if we look at just the fundamentals of the economy and assume that the federal tax law has an impact, we might be erring more on the low side. I think we could see growth anywhere up to 2.5% and maybe beyond that.”
As Bowers explained, macroeconomic factors that have yet to fully materialize may have a considerable impact in the coming year. For example, the new federal tax law is expected to have a positive impact on corporate spending. For hotels that cater to business travelers, this could mean a large uptick in demand.
“One thing that’s really a little bit of a wild card is the federal tax package,” said Bowers. “Especially on the corporate side of things, that could give a little bit of a boost to demand, because that may help the economy along. If corporations don’t have to pay as much tax, they can spend a little bit more on travel and conventions.”
It’s when you start to dig in and analyze performance on a geographic level that the picture becomes less certain. Although industry analyst predictions are fairly consistent across the board, on a market-by-market basis, there are some “boom” and “bust” locations to keep an eye on in 2018. On the boom side, CBRE sources named Louisville, KY; Oahu, HI; and Tucson, AZ, as contenders for a robust year.
“Each one of these markets has a different story,” said Woodworth. “Louisville is coming up, with some major renovations and expansions to the convention center, so you might say it’s a rebound situation. Whereas you take Oahu, and a lot of it is inbound international travel coming from the Asia-Pacific region. They’ve been doing well, and they’re going to do that much better as demand continues to grow.”
The markets that may not fare so well, conversely, include Dallas, Houston, Seattle, Savannah, GA, and Nashville, TN. These locations are expected to suffer the effects of new supply, short-term demand boosts and, potentially, a combination of the two.
“Dallas and Houston are kind of the weakest markets that we’re forecasting in terms of occupancy change next year relative to this year, and in every one of those cases, the answer begins with lots of new supply coming in. All of them, except Houston, have pretty good economic bases,” said Robert Mandelbaum, director of research information services for CBRE Hotels’ Americas Research. “In Houston, they were bumping occupancy this year because of the hurricane. Part of it was there was an abnormal surge that came from people needing temporary housing, so it’s more of a return to normalcy in that particular case.”
The situation in Houston—which was caused by a natural disaster—underlines the importance of the broader, national- and international-level macroeconomic factors on the lodging industry’s overall performance. In addition to the federal tax law, experts say there are other unknowns that may also shape this coming year, for better or worse.
“One of the things everyone’s concerned about is North Korea, and that’s always in the back of everyone’s mind,” said Bowers. “Uncertainty weighs on companies’ propensity to spend, and if that can smooth out a bit, it looks like the economy is certainly in good shape. If that can continue to be the case, then maybe our 2018 forecast might be a little too bearish, because I think there’s opportunity there. From a policy standpoint and the government and how that’s going to work, it looks pretty good for now. But it’s always that unexpected event.”