Weak Performance Projected For U.S. Hotel Industry In 2021
Want to get a jump-start on upcoming deals? Meet the major players at one of our upcoming national events!
Cautious optimism continues to dominate the U.S. hotel industry, except for what CBRE's top hotel researcher expects to be a minor economic blemish nearly two years from now.
The economy’s continued growth has been good news for the U.S. hotel industry, which saw 2.4% average daily rate growth in 2018 and a 66.2% national occupancy rate. It was the fourth consecutive record high for ADR since 1988, according to CBRE’s latest “Hotel Horizons” report.
While experts don’t expect the industry to falter this year or next, data points to a downturn, a short one, in 2021.
“One of the more important messages we’re trying to convey to the industry is we’ve obviously been on a great run for a long time, but the pattern is going to be different over the next few years,” said Mark Woodworth, CBRE senior managing director and head of lodging research. “But it’s only a slight blip.”
The projected blip — "don’t call it a dip,” Woodworth added — in growth is only expected to be a 0.6% decrease in revenue per available room, or RevPAR, in 2021. The anticipated decline is fueled by employment concerns.
While there might be a slowdown in job creation, the weaker hotel performance stems from concerns the industry is running out of workers to fill positions. Hotel operators need to spend more to recruit talent, and that can take a bite out of a property’s profit.
“Higher wages and benefits can put a negative pressure on profitability,” said Gary Isenberg, president of asset and property management services for New York-based LW Hospitality Advisors. “Record-low unemployment means it’s costing so much more money to recruit people for entry-level positions.”
While he still sees industry fundamentals and economic indicators as generally strong, Isenberg has noticed a general conservatism from hotel operators and investors over when a downturn might arrive and an increased focus on profit margins. That sometimes includes utilizing technology or merging back-of-house operations at dual-branded hotels to cut down on escalating payrolls.
“They’ve always been focused on RevPAR growth, but now we’re seeing the industry focus on profits and opportunities to tighten the belt,” Isenberg said.
Before the blip, CBRE still expects the hotel industry to post gains, albeit shrinking ones. RevPAR is expected to rise 2.5% in 2019 and 2% in 2020 before dropping in 2021. After 2018’s 2.4% growth, ADR is forecast to tick higher to 2.6% in both 2019 and 2020 before slowing to 1.3% in 2021.
The report emphasizes the anticipated weakness in 2021 should be seen more as a slowdown than a drastic downturn. CBRE expects the industry to return to growth mode the following year.
“It’s slowing down, but we’re not concerned with any big dips like we saw that ended the last two economic cycles,” Woodworth said.
Of the 60 U.S. hotel markets CBRE tracks, he said two-thirds are still in expansion mode. RevPAR in San Jose is 60% above its previous peak in 2008. Nashville’s RevPAR is up 50%, and Boston’s is up 19%. But some markets have already begun to dip into a contraction mode. Baltimore’s RevPAR was down 1.1% at the end of 2018, which Woodworth attributed to a flood of new supply and weaker economic conditions in the city.
While there might be some softer markets, Isenberg said the industry is hawkish about any greater downturn.
“I can’t emphasize enough how everyone I talk to is watching, waiting and preparing,” he said. “People are going into it with eyes wide open.”