STR/TE Market Forecast Assumptions – August 2022
Market Forecasts, produced by STR and Tourism Economics, provide you with the insights needed to anticipate future performance. Based on the industry and economic assumptions below, the latest forecasts are available for purchase here.
The August 2022 edition of the forecast is the first to use the updated supply methodology, detailed below. As a result of the change, forecasted supply has been moderately reduced across most markets, and demand has commensurately been downgraded. The net impact on occupancy will be positive, with most markets reporting upgraded occupancy in the short-term.
Macroeconomic assumptions and pandemic recovery
COVID-19 restrictions have been widely eliminated across Europe and the Middle East, drastically increasing the pace of recovery, and bolstering domestic and international travel. While COVID remains a concern in some regions, particularly for corporate and group demand, economic headwinds have supplanted the pandemic as the key forecast consideration for coming quarters.
Although GDP growth is expected to slow over the coming quarters, a soft landing remains a distinct possibility for most European countries, and travel recovery will continue through 2023. However, economic headwinds, including slowed GDP growth, rising interest rates, and sticky inflation are expected to weigh on hotel demand in Europe from late Q4 2022 through Q1 2023.
While most Asia Pacific countries have largely ended or substantially reduced COVID restrictions, the region remains much more conservative than Europe regarding COVID policy. That caution, as well as the regional reliance on both Chinese travelers and long-haul international demand, will see APAC continue to lag Europe and the Middle East in travel recovery. China remains the notable outlier to APAC recovery, with the government’s strict COVID-zero strategy expected to remain in place until the end of 2022 A gradual border reopening strategy will not begin in China until early 2023, which will impact inbound international demand in both China and key source markets like Japan and Australia.
The war in Ukraine has caused uncertainty among travelers to Central and Eastern European destinations. Continued conflict in Ukraine presents modest downside risk to the return of long-haul international travel, and increased sanctions and political conflict surrounding Russian energy exports have emerged as a new risk, particularly to Russian gas-reliant regions like Germany and the Czech Republic. While the pace of recovery in these markets has slowed as the conflict continues, the forecast has been upgraded due to pent-up demand driving strong travel recovery year-to-date. Related to the war, Dublin’s demand and average daily rate (ADR) continue to be lifted as the city houses refugees. The added demand is creating a compression scenario, with fewer rooms available in the market while at the same time international inbound travel rebuilds. However, the impacts are expected to subside as rooms are released over the coming months.
Leisure travel continues to drive demand, particularly over Q2-Q3, and is expected to remain a key driver over coming quarters. Business travel, while still well below pre-pandemic levels, has resumed and is expected to continue improving over the coming quarters, although the economic outlook presents moderate risk to corporate transient demand.
The long-term recovery outlook has stabilized, with domestic demand expected to bounce back by year-end. International demand should reach pre-pandemic levels by 2023 in the Middle East, 2024 in Europe, and 2025 in Asia Pacific. The long-term outlook will see a moderation in both demand and ADR growth as the impacts of pent-up demand fade and the increased cost of living reduces the excess savings currently driving demand.
The long-term demand outlook remains largely unchanged from prior forecasts, but long-term ADR has been substantially upgraded across most markets. For European and select APAC markets, an inflationary environment has led to rapid rate growth in 2022, and analysis suggests that while rate growth will moderate over time, strengthened rates resulting from inflationary periods are sustainable and unlikely to decline absent of supply-driven reasons. Economic risks, including a mild recession or persistently high inflation, present downside risk and could lead to moderation in long-term performance trends.
The short-term outlook for STR’s 48 forecast markets continues to improve, with 2022 occupancy and ADR upgraded for most European markets despite looming economic headwinds. Pent-up leisure demand has been further bolstered by travel subsidies in some regions, and rescheduled COVID-era events are helping promote corporate demand. Strong demand alongside persistently high inflation and tight labor markets will contribute to continued ADR growth. While the pace of recovery for most European markets is expected to slow from Q4 2022 through Q1 2023, demand remains on track for recovery by 2023 for the 32 European forecast markets. The inflationary environment will support strengthened rates, with ADR growth expected to maintain double-digit growth levels compared with 2019 this year and next.
Rapidly rebuilding international inbound travel and the resumption of corporate demand and events have led to improvement in the total-year 2022 occupancy forecast for most APAC markets. Auckland and Sydney are notable outliers, as their reliance on Chinese travelers and continued work-from-home policies weigh on both leisure and corporate demand. Increased demand, inflationary pressures, and staffing shortages have led to improvement in ADR across most markets, although macroeconomic concerns are not as widespread as in Europe. Demand recovery remains set for 2023, with China expected to reopen borders next year. ADR recovery has been improved from 2024 to 2023, in large part due to substantial upgrades in Mumbai and Melbourne ADR.
Middle East markets continue to benefit from strong intraregional travel and “mega events,” although economic headwinds in key source markets could weigh on 2023 demand in the UAE’s largest market. An end to EXPO-era high ADRs in combination with continued high supply growth has led to modest downgrades in Dubai ADR over the next two years, although the end to quarantine demand has allowed Abu Dhabi ADR to improve in 2022.
Data prior to 2020 and from 2022 forward utilizes STR’s standard methodology, which considers supply for all open hotels in a market and does not include temporarily closed properties. Total Room Inventory (TRI), which assumes no temporary closures related to COVID-19 and accounts for all available hotel rooms in the marketplace regardless of operational status, has been used for 2020-21 data to appropriately capture the impacts of the pandemic. From 2020-21, all rooms that we know to be closed have been added back into supply with “0” demand and “0” revenue. An exception has been made via a permanent closures analysis (see next point).
No changes have been made to the methodology from the February 2021 forecast.
The methodology compares current performance for each market against the worst period of the Global Financial Crisis (GFC) to determine the extent to which hotels are more adversely impacted by the pandemic. This is then applied to the permanent closures observed during the GFC period to determine a new rate of permanent closures during the pandemic. Closures are assumed to take place over a three-year period that began with April 2020, compared with five years during the GFC. Half of these closures are assumed to occur in the first year while the remainder is spread across the following two years. All permanent closures that have occurred to date have been removed.
In Tokyo and Dubai, respective hosts of the Olympics and EXPO, the phasing of these closures was adjusted to expect a lower weighting of closures in year one than in the following two years.
The analysis on delay rates, first introduced with the November 2020 forecast, remains unchanged from the November 2021 update.Delay rates were calculated for all markets based on delays observed since the pandemic began. These rates determined the proportion of new rooms from the pipeline that are likely to be delayed in the near-term. The delay rates have been applied to pipeline rooms scheduled to open between Q4 2021 and Q1 2022 with opening dates pushed back to the following 12-month period (April 2022 to March 2023).
For those projects in earlier stages of development (i.e., planning and final planning), a higher probability of abandonment is applied, and therefore reduces the future supply expected to enter the market in the long-term.
Quarantine rooms methodology
STR’s methodology does not include rooms sold within hotels that are entirely rented or leased out to a health organization or government agency for quarantine purposes. Singapore and New Zealand are exceptions to this guideline, and these regions include historic and forecast quarantine demand in market-level performance.
In both markets, the government contracted with multiple hotels, resulting in high occupancy rates, albeit at a lower ADR. While a limited number of hotels remain dedicated quarantine facilities, most hotel rooms in Singapore and Auckland have been released from contract and are again available for normal bookings.
Within STR’s methodology, if a hotel is partially open for quarantine, its rooms are included within market supply as in Abu Dhabi, where hotels can accept quarantine and normal demand.
As in previous updates, we have accounted for canceled and postponed events in each of the markets and assumed lower event attendance than in normal times. At this stage, few to no events have been cancelled or postponed in Europe and the Middle East, and calendars in these regions have rapidly filled with rescheduled events. Events have resumed across most of Asia Pacific as well, although Shanghai and Beijing remain notable outliers, with strict restrictions in place limiting events through year-end 2022.
Global travel and tourism trends
International travel recovery is off to a strong start in 2022, with travel restrictions easing at a swift pace following the wave of Omicron infections earlier in the year. High frequency data points to a strong desire to return to travel across many destinations. Headwinds including disruption linked to staff shortages and the escalating squeeze on incomes in advanced economies will limit aspects of recovery later in the year and more so in 2023.
Overall, our forecast for global international arrivals for 2022 remains unchanged, at 41% below 2019 peak levels, as upgrades to the travel outlooks for Europe, North America, Middle East and Africa are offset by downgrades for the Asia-Pacific region. The conflict will limit travel activity due to three main effects: Reduced travel from Russia and Ukraine, including the effects of no-fly zones and airspace closures as well as lingering sanctions; wider economic impacts of sanctions on inflation and disposable income; and sentiment effects due to safety concerns.
A strong bounce back in international travel to Europe is evident in early 2022 data, driven by short-haul markets. Momentum is set to continue into the summer, despite inflationary pressures as pent-up demand will be supported by savings built up earlier in the pandemic. Staff shortages within the sector, particularly for air travel, could prove detrimental to the expected summer recovery if recent delays and flight cancellations persist. This could cause visitors that have not yet booked travel, or even those that already have booked decide that another staycation is a safer option this year.
The Asia-Pacific region continues to have the most pessimistic forecast of any global region. The region is forecast to be 77% below 2019 levels in 2022, a downgrade from the March forecast which expected inbound arrivals to be 68% lower than 2019. Travel recovery is beginning as a number of countries have started to ease restrictions, albeit at varying paces. Australia, New Zealand, and Thailand have opened at a modest pace, while Japan has only reopened for guided tours and China continues to maintain its zero-COVID policy. Given China’s dominance as a source market – in 2019, it accounted for 23% of total inbound travel across the Asia-Pacific region – the prolongation of the zero covid policy will continue to stilt recovery.
International arrivals in 2021 to the Middle East were 69% below 2019 levels. Significant recovery is expected in 2022 assisted by further easing of restrictions and major events and the region is still expected to recover to 2019 levels by 2024 (+7%). Relatively rapid recovery will be at least partly driven by travel to United Arab Emirates and Qatar. Expo 2020 (held in late 2021 and early 2022) has helped accelerate the recovery of UAE’s tourism sector but has also been supported by the early easing of restrictions following widespread vaccination. A softer policy stance towards Russia following the Ukraine war has also helped, with the UAE remaining one of a smaller basket of destination options for Russian outbound travel.
Global macroeconomic trends (source: Oxford Economics):
Global GDP growth in Q2 has been lackluster for a second quarter running due to disruptions stemming from the Ukraine war, the squeeze on household incomes and COVID-related activity restrictions in China. A key factor behind deteriorating growth prospects remains high inflation, which is sapping consumers' real incomes and raising business costs. This is especially a problem in the G7, where inflation is expected to average 7% this year and 2.8% in 2023. Global GDP is forecast to grow 2.8% this year, down 0.8pp from the last update.
In Europe, the service sector continues to outperform other areas in the economy, buoyed by tailwinds from the removal of COVID restrictions. While consumers are now able to spend more in person, rising inflation is likely to result in greater caution over discretionary spending. Although recent data shows that businesses are coping relatively well with higher costs, other survey data are more pessimistic, suggesting possible downside risk to consumption. The outlook for Eastern Europe remains weak for Russia, which has been subject to extended sanctions since May, and for countries with a reliance on Russian gas.
In the US, The GDP contraction in Q2 was worse than expected and marked the second quarter of negative growth. We doubt the US economy is in a recession given the labor market strength. However, the weakening in domestic demand confirms the economy is rapidly downshifting amid stubbornly high inflation and aggressive Fed tightening. We have lowered our GDP growth forecasts for the US by 0.2ppts to 1.7% this year, reflecting weaker growth in H1, and by 0.1ppt to 1% in 2023.
We have downgraded our 2022 GDP growth forecast for China to 3.2% from 4% previously, reflecting both dismal GDP growth of just 0.4% y/y in Q2, the worst outcome since the start of the pandemic, and the absence of new stimulus. Policy stimulus introduced earlier, notably infrastructure investment, will take effect in H2 to support growth, but we expect the recovery in H2 will be bumpy due to the ongoing dynamic zero-COVID policy and the real estate downturn. Indeed, while June data was more positive as the economy continued to normalize from lockdowns, July's PMIs suggest manufacturing activity is losing momentum again. We forecast 5.1% growth in 2023, assuming China moves past its zero-COVID policy next year.
STR provides premium data benchmarking, analytics and marketplace insights for the global hospitality industry. Founded in 1985, STR maintains a presence in 15 countries with a corporate North American headquarters in Hendersonville, Tennessee, an international headquarters in London, and an Asia Pacific headquarters in Singapore. STR was acquired in October 2019 by CoStar Group, Inc. (NASDAQ: CSGP), the leading provider of commercial real estate information, analytics and online marketplaces. For more information, please visit str.com and costargroup.com.