The downturn has begun
The downturn has begun
08 JULY 2019 7:37 AM

For most owners and operators, occupancy has peaked. Room rates are likely to soften further, following years of rising occupancy and anemic rate growth. The question now is how long and how deep this downturn will be.

While it may be too early to officially announce the death of the cycle, it seems clear that we are in the early stages of a downturn.

Even with slightly better results in May, year-to-date trends show negative occupancy for all but the highest and lowest chain scales, while urban markets are underperforming national averages. Given softening revenue trends and rising costs, most hotels are seeing flat to down profits.

The economy continues to show signs of weakness, though signals remain mixed. My view is that we are likely to see a recession—perhaps it is beginning now. But I don’t expect a long or particularly deep recession.

For hotels, I don’t expect the downturn to be nearly as deep as the last two, but with supply growth peaking around 2%, demand is unlikely to keep pace. Absent some exogenous event, I don’t see demand growth going negative. This should lead to national occupancy in the flat to down 1% range over the next 12 to 18 months.

Evidence of this occupancy decline is beginning to show up in STR data. STR’s Jan Freitag, in his U.S. monthly industry performance presentation, looks at the number of submarkets with RevPAR decreases; year to date through April 2019, 37% of submarkets are experiencing negative RevPAR change, versus 28% for the first four months of 2018. (STR is the parent company of Hotel News Now.)

STR provided me with similar data focused on negative occupancy change. The picture is considerably more negative, with 50% of U.S. submarkets showing declining occupancy over the first five months of 2019, versus 43% in the comparable year-to-date period in 2018.

Will rates go negative? It is hard for me to see a scenario where the majority of operators don’t cut rates to gain market share. All the lectures about discipline are not likely to dissuade individual actors from putting the interests of their properties first. This is human nature and a basic economic principal.

Given occupancy is still high nationally, I don’t see rates dropping precipitously, but rather declining 1% or 1.5%. It would not surprise me, therefore, to see RevPAR decline between 1.5% and 2.5% in the year ahead.

Clearly, some U.S. markets and some properties will fare better. Given the pace of supply growth in the top 25 markets, it makes sense to expect “all other markets” to outperform. A recession may also drive travelers to lower-priced hotels. While group trends look stronger in a number of markets next year, based on convention calendars in those markets, this may not be enough to offset transient weakness.

In the face of likely revenue softness, it seems unlikely that cost growth will slow. Labor has been grabbing the headlines, for good reason given low unemployment. A recession could ease upward wage pressure somewhat, but it seems likely that hotels won’t be the first beneficiaries of any labor market slack. Rising minimum-wage rates and efforts to reduce turnover are likely to keep labor costs growing over the next several years.

Property insurance rates get less attention, but they are surging. Following severe weather and large-scale hotel damage, I am hearing from owners that insurance rates are rising at a double-digit pace. Unless we see an extended period of limited damage from natural disasters, which seems unlikely, it’s hard to imagine this trend easing.

Similarly, property taxes continue to rise, as municipalities look for ways to supplement budgets. Again, this is not a trend likely to reverse near term.

All of this is bad news for hotel’s bottom line. But this won’t last forever, and it is highly unlikely to devolve into the kind of profit declines seen in the last two downturns.

How long will this downturn last? I suspect we will see rising occupancy once the economy picks up steam, which may be a year or more away. Even if the Federal Reserve lowers interest rates, trade will likely remain a headwind, barring a near-miraculous resolution to the multi-front trade war. And it is likely to take time to overcome the drag created by the pulling forward of investment following the tax cuts.

If the U.S. begins hostilities in the Middle East, all bets are off. In addition to the consequences to the U.S. economy of military intervention in the region, there could be a heightened risk of, or fear of, terrorist activity, which often cools travel trends.

Let’s hope for peace and prosperity. Eventually, stronger economic activity should lead to demand growth consistently outpacing supply growth. Until then, all anyone can do is tighten belts, control cost wherever possible, and treat the industry’s customers and employees with great care.

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

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