U.S. Lodging Industry Performance Appears to Be Sustainable CBRE Research Forecasts Occupancy to Increase Through 2019
"Using terminology from my colleagues in the physics department, the U.S. lodging industry reached its 'escape velocity' back in 2014," said John B. (Jack) Corgel, Ph.D., professor of real estate at the Cornell University School of Hotel Administration and senior advisor to CBRE Hotels' Americas Research. "U.S. hotels returned to their previous peak occupancy levels that year and arguably have moved to an even higher orbit with the record occupancy expected for 2017. Our forecasts show that hotels will sustain a very high level of performance. Looking at all the economic and market factors that could influence hotel performance in the future, if the industry were to jettison itself from its current glide path, the trajectory would more likely be upwards, not downwards."
Despite the record occupancy levels, average daily rate (ADR) growth continues to challenge hoteliers. Factors such as increased supply growth, low inflation, the sharing economy, revenue management beyond RevPAR and book-direct, best-price guarantees all put downward pressure on the ability of operators to raise rates. For 2017, CBRE is forecasting an annual ADR increase of 2.2 percent, followed by 2.5 percent in 2018. Both measures are below the long-run average annual ADR growth rate of 3.1 percent.
"Low ADR growth could have an impact on the profitability of hotels. With compensation costs rising more than 4.0 percent, hoteliers may not be able to sustain the growth in profit margins observed the past seven years. On average, hotels still should be able to enjoy gains on the bottom-line, but the flow-through will not be as efficient," Woodworth noted.
As hotels finalize their 2018 budgets, it is important for owners and operators to understand their local market conditions. Previous research conducted by CBRE has found that 75 to 80 percent of a hotel's performance is dictated by local economic and market factors. "We continue to see great diversity among the performance of the 60 markets in ourHotel Horizons® universe. For 2018, approximately half of the markets are forecast to achieve real growth in RevPAR, but more than a half dozen will suffer actual declines in this important measure," Woodworth said.
Among the 31 markets forecast to achieve RevPAR changes below the projected 2.1 percent inflation rate in 2018, the average increase in lodging supply is 3.8 percent. Conversely, the remaining 29 markets forecast to see RevPAR growth greater than 2.1 percent will see their competition increase by just 2.7 percent. "Supply change continues to be a critical local market issue. Pipeline activity across the 60 markets we analyze is very polarized and is the major influencer of our forecasts for occupancy and ADR change. The good news is that supply growth in several of these markets moderates beyond 2018," Woodworth concluded.
To assist hotel owners and operators in the preparation of their 2018 budgets, the December 2017 edition of Hotel Horizons® for the U.S. lodging industry and 60 major markets can be purchased by visiting: https://pip.cbrehotels.com
CBRE Hotels is a specialized advisory group within CBRE providing capital markets, consulting, investment sales, research and valuation services to companies in the hotel sector. CBRE Hotels is comprised of more than 385 dedicated hospitality professionals located in 60 offices across the globe.
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About CBRE Hotels
CBRE Hotels is a specialized advisory group within CBRE providing brokerage, valuation, consulting, research and capital markets services to companies in the hotel sector. CBRE Hotels is comprised of over 375 dedicated hospitality professionals located in 60 offices across the globe.
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CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world"s largest commercial real estate services and investment firm (in terms of 2015 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.