The partial U.S. government shutdown presents another risk for the economy and the hotel industry in a year already fraught with risk.
A year ago, in my first column for HotelNewsNow.com, I suggested that a new upswing had begun for the U.S. hotel industry in 2017 and would continue in 2018 and perhaps beyond. I ended with a prediction that this cycle would end gradually, “with a gentle decline in occupancy as demand slows and supply growth remains steady.”
After a slow period in the second half of last year, largely against hurricane-induced comparisons and partially due to holiday shifts, it looks like my prediction of slow growth is on track. Given my success, I have decided to tempt fate and make another series of predictions about 2019. In the predication business, if you are right half the time, you are considered a success. Therefore, if I am flat wrong this time, I will still average 50% accuracy.
2019 is likely to see near balance between demand and supply nationally with occupancy bouncing along near flat but generally in positive territory. But there are numerous danger signals on the horizon, including the lingering U.S. government shutdown, which is likely to be a significant drag on demand until it is resolved. The bond market is beginning to signal that a recession is ahead, inflation has picked up in ways that generally hurt hotel performance and labor markets are tight, all at a time when ADR gains appear difficult to achieve. This is likely to challenge margins and operating results at the same time that rising long-term interests could begin to exert downward pressures on valuations for hotels.
Let’s take a few of these topics in turn and explore each further.
Economic growth has been strong, with solid GDP growth and very strong employment trends, but clouds are on the horizon. The yield curve is signaling a recession ahead at some point, though I don’t think it starts this year.
But the political rhetoric in Washington and the divisions in our culture seem like they will take a toll on the economy eventually. The partial government shutdown is one aspect of that, one that is likely to hurt the economy in the short run and dampen travel demand for as long as it continues. Inflation has been a bit stronger, keeping the Federal Reserve on track to “normalize” interest rates. One big risk I see is ongoing saber rattling regarding international trade. Higher tariffs could hurt the economy and bring us closer to recession; they could also hurt international travel trends and decrease domestic investment spending, which is highly correlated to hotel demand.
The stock market
I don’t think we are done with the volatility and poor stock performance we have seen in recent weeks. I am not saying the market will be down in 2019, but I don’t think it will have a banner year.
There are likely to be major upswings and serious sell-offs as the market gets a handle on the economic outlook and the trend in interest rates. Valuations seem quite reasonable to me, with many hotel stocks trading like we are rapidly approaching a downturn, which I don’t see. But stocks can stay cheap for a long time, often until fundamentals turn lower. Buckle up and look for bargains, but don’t expect them pay off right away.
Interest rates/cap rates
While short-term rates continue to rise, long-term rates have come down, reflecting money hiding in treasuries. I think long rates will be higher by the end of the year, but short rates are likely to go up as much, possibly keeping the yield curve inverted, a dependable signal of an approaching recession. All this will eventually lead to higher cap rates and lower hotel and real estate values, but that might take years to play out. Strong cash flow could more than offset higher cap rates, but only for operators able to keep costs in line and grow room rates.
Given the approximate balance between growth in demand and growth in supply nationally, I see occupancy near flat for the year ahead. However, the longer the partial government shutdown continues, the better the chance that occupancy ends the year slightly down. Moreover, the disparity between top 25 market performance and the rest of the country is likely to grow this year; supply growth is largely concentrated in top markets, making it more likely that larger markets experience a slight decline in occupancy with everywhere else showing a slight increase.
Average daily rate
Rate pressures are likely to continue in the year ahead. High absolute levels of occupancy are usually a good predictor of strong rate growth, but that has not held true this cycle. With occupancy near flat and ample competition from alternative accommodations, I expect revenue managers to be shy about pushing room rates.
Given the likely mix of rising labor costs, modest room rate growth and cost pressures elsewhere in the income statement—including property taxes—margins are likely to remain under pressure. There is no easy out from tight labor markets. Hotels need good employees and are likely to pay them more them in order to limit turnover.
All in all, not a very upbeat outlook. Let me know what you think and what you are seeing.
After a 30-year career as a stock research analyst, David Loeb created Dirigo Consulting LLC, which advises on capital markets, strategy and communications issues. Clients have included REITs, brands, and private equity investors. He a member of the board of directors of CorePoint Lodging Inc., a publicly traded hotel REIT. He can be reached at email@example.com.
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