Originally seen HERE.

Although revenue growth for hotels in the United States will continue to slow, CBRE Hotels Research is reporting that the hotel industry will remain strong through the next two years. That’s the good news gathered from the data outlined in the company’s December 2019 edition of Hotel Horizons. But while the report shows some optimism, forecasts for performance growth are a mixed bag and don’t appear anywhere near the growth rates that the industry has been enjoying the past few years.

According to the report, U.S. hotel occupancy will dip slightly but remain above 65.5 percent through 2021. That’s 300 basis points greater than the STR long-run average, researchers noted. Additionally, revenue per available room is expected to increase at less than 1 percent per year during the same time frame.

So, should hoteliers be worried about a downturn on the horizon? After all, economic uncertainty continues to loom. R. Mark Woodworth, senior managing director, CBRE Hotels Research, said that the U.S. hotel industry has deviated from economic norms throughout the Great Recession recovery.

“Despite an economy that has supported strong growth in lodging demand and record occupancy levels, hoteliers have been unable to achieve gains in average daily rate commensurate with what we have seen during equally strong market conditions,” he said. “We believe an environment of high occupancy with low ADR growth will persist for the foreseeable future.”

CBRE has upped its forecast for U.S. hotel demand growth, from 1.8 percent in its September edition to a 2 percent gain in the December edition. The updated outlook calls for the national occupancy rate to remain at the 66.1 percent record level achieved in 2018. That will mark the 10th consecutive year without a national occupancy decline, analysts noted.

And while supply and demand appear to be balanced, researchers said that room rate growth potential remains limited. CBRE is forecasting annual ADR for U.S. hotels in 2019 to be at $131.08, which is 0.9 percent over the $129.97 national average in 2018. The net result is a RevPAR increase of 0.8 percent for the year.

“We’ve researched this ADR challenge and have not been able to identify one unique cause for the separation between high occupancy levels and slow ADR growth,” said John Corgel, professor of real estate at the Cornell University School of Hotel Administration and senior advisor to CBRE Hotels Research.

CBRE has determined some factors that have slowed ADR growth include, but are not limited to, growth in local market supply, low inflation, competition from the sharing economy and the expansion of intermediaries in the sales process.

CBRE reduced its forecast for ADR growth to below 1.5 percent through 2022. Not only does this result in a lack of real ADR gains, but the low ADR gains limit RevPAR growth to under 1 percent through 2021, according to analysts. CBRE forecasts nominal RevPAR growth rates of 2.1 and 3.5 percent in 2022 and 2023, respectively. This will represent real RevPAR gains of 0.3 percent in 2022 and 1.5 percent in 2023.

Woodworth said that the hotel industry has historically followed traditional cyclical performance patterns of peak, contraction, trough, expansion and then back to peak. The U.S. hotel industry reached the peak of the current cycle in 2018. That being said, history calls for a downturn either in 2020 or 2021. But because the forecast declines in occupancy and real ADR are minimal, there is a slight rollback in performance now. That will lead to sustained expansion beginning in 2022, he said.

“Despite the 2020 and 2021 forecast performance slowdown, U.S. hotels are operating at near record levels of occupancy and efficiency,” Woodworth said. “The growth story is not great, but we expect the U.S. lodging industry to circle back to 2018 performance levels, and beyond, starting in 2022.”

Time to Control Expenses

Additionally, researchers noted that hotel operators will be tested in their ability to expand profits due to the low revenue growth environment they will be working in. Low levels of unemployment continue to put upward pressure on salaries and wages, which make up half of the expenses at most U.S. hotels.

CBRE’s inflation forecast remains below 2 percent through 2022, controlling the cost of the goods and services other than labor. However, with RevPAR growth limited to less than 1 percent, hoteliers must keep expense growth to below 1.5 percent in order to achieve nominal gains in gross operating profits. 

“Considering expenses have increased at an average annual pace of 4 percent since 1960, the challenge ahead is clear,” Corgel said. “This is all tempered by the fact that GOP margins are near their all-time high.”