Hoteliers have some worries. U.S. occupancy, while high, is
stalling in growth. First-quarter earnings were lackluster thanks to slow U.S.
business travel and Easter's shift to March. Past that, U.S. GDP growth is low,
hotel supply is up, world events in Europe and Latin America have swayed demand,
Brexit's impact remains a giant question mark … The list goes on.
For corporates, these factors likely translate to more
strength in the upcoming request for proposal season.
Bjorn Hanson, a clinical professor at the New York
University School of Professional Studies Tisch Center for Hospitality and
Tourism, releases an annual report on corporate negotiated rates. Though his
report doesn't come out until August, he told me that right now he anticipates
the balance of power will shift more in favor of buyers than last year. "Buyers
are feeling that their position is stronger than last year, and sellers' view
of the world is that occupancy is the highest it's been since 1984," he
said. "It's a complicated environment."
The Sell Side
At the recent NYU International Hospitality Industry
Investment Conference, top hotel executives all but dismissed the idea that the
good times are over for the industry. CBRE Hotels senior managing director Mark
Woodworth has an expression that I heard repeated during the conference: Just because
we've reached our peak, doesn't mean the cycle's over.
Maybe hoteliers are right. According to Woodworth, there are
five things that, when combined in some quantity, typically spell the end of the
hotel industry's prosperity: Economic weakness, asset price bubbles,
unanticipated developments, high energy prices and oversupply.
Let's game this out. Right away we can remove energy prices
from the equation, given that the oil industry has been in its most
significant downturn since 1999. Asset price bubbles, too, we can take off
the table because we don't know about bubbles until they burst — though some
are eyeing
the commercial real estate market for trouble.
An unanticipated development is, obviously, unanticipated.
While the terrorist events in Paris and Brussels hurt hotel demand in those
cities, Four Seasons CEO J. Allen Smith said the impact of those events
remained fairly local, and an STR analysis found that occupancy at hotels in
those cities rebounded within about three months. Brexit certainly shocked
global markets when it was first announced, but for now the real impact remains
to be seen.
That leaves us with hotel supply and the economy.
Supply is up. Markets like New
York City, Houston and Miami are already experiencing the consequences of
oversupply. Yet, STR still forecasts 2016 growth to be 1.5 percent, which is
about half of what supply growth was at the last peak, in 2008. And hoteliers
don't think that oversupply alone is enough to cause a reversal of fortune. "We
have never had a supply-induced turndown in lodging performance, never,"
Marriott International CEO Arne Sorenson told NYU conference attendees. "Downturn
in RevPAR has always been driven by the demand side of the equation."
What affects demand? The economy. GDP growth in 2016 has
been, to borrow Sorenson's own descriptor, pretty tepid. In the first quarter,
it increased 1.1 percent on an annual basis, according the Bureau of Economic
Analysis. It's predicted
to grow about 2 percent in the second quarter—still just OK, certainly not negative.
Beyond GDP growth, a disappointing jobs market data report for May spooked some
economists, who aren't sure how to frame the severe disconnect between the
number of jobs that were expected to be added, 158,000, and the number of jobs
actually added, 38,000.
Federal Reserve chair Janet Yellen, for her part, said the central
bank is holding off on raising short-term interest rates until the economic
outlook is clearer. The International Monetary Fund, too, weighed in on U.S.
economic health on June 22 by lowering its 2016 economic growth outlook from
2.4 percent to 2.2 percent, citing such concerns as declining labor-force participation,
lower productivity growth, income inequality and high poverty levels.
By Woodworth's litmus test, the sky isn't falling on the
hotel industry, in spite of concerns over the economy, supply, terrorism and a
potential global financial disaster. However, the hotel industry is on the
downslope from its peak. Best Western Hotels & Resorts CEO David Kong said
hotels are at a point where any RevPAR growth is being driven mostly by rate
growth and not by occupancy, which is "cause for concern."
The Buy Side
There's been a marked
weakness in U.S. corporate travel so far in 2016. The good news is that it
seems to be rebounding, with the latest TravelClick
data indicating a pickup in business transient bookings for the third
quarter of this year. The other positive is that hoteliers likely won't hold
that weakness against corporates in the upcoming RFP season.
With hotel performance likely to soften in the coming years,
it's looking like a good time to remind hoteliers of your program's value. From
a revenue-management standpoint, hotel properties typically want an initial 30
to 50 percent rate of occupancy because that allows them to increase rate for
that remaining 50 to 70 percent of business. Corporate travel represents
"a desirable base" of occupancy for hoteliers, Hanson told me. As
occupancy is expected to remain flat next year, companies that can shift share
to properties stand to benefit. The Rainmaker Group's Dom Beveridge did point
out that group travel is even more attractive, as those rates are negotiated
farther in advance. So be prepared to compete.
Another thing to keep in mind this coming
negotiation season is the introduction of special discounted rates through
hotel loyalty programs. Are those rates beating your negotiated rates? If so,
it's time to ask some tough questions at the negotiating table about what your
business is worth.