News feed - Hotel sector
Hotel Revenues Worsened in October, but the Outlook Is a Bit Better
Five Things to Know About the State of the Hospitality Market
By: Jan Freitag November 25, 2020 CoStar News
1. Revenue Declines a Bit Worse
October revenue per available room declined 48.8%, and a “better than -50%” performance was expected, but it is little comfort to see the key performance measure turn down than September data. I guess my thinking was the performance was already so depressed, each month should at least show a minimal improvement — just like we saw between September and August. Alas, it was not meant to be:
The reason for this was likely the disappearance in leisure travelers who, while still taking advantage of summer days and rates after Labor Day, eventually returned home. Combine this with continued lack of business travel because offices are still empty and the outcome is that the results are slipping. And there really is no improvement on the horizon.
2. Cognitive Dissonance
In psychology, cognitive dissonance is the mental stress or discomfort experienced by an individual who holds two or more contradictory beliefs, ideas, or values at the same time.
The two figures that could cause said condition are “1 million” and “+10%.” The following chart should strike fear into the hearts of hoteliers, lenders, and destination marketing organizations across the land — since it likely has impacted the traveler psyche already. In the week ending Nov. 14 the U.S. registered 1 million new COVID-19 cases.
Given this, it is no wonder that when Ugur Sahin announced from his company BioNTech’s headquarters in Mainz, Germany, that its COVID vaccine was 95% effective the stock market analyst community lost its collective mind (in a good way). Analysts basically conjectured that this meant that the virus is over and done with and that travelers will be back in hotel lobbies and hotels will make money again. That at least is what you must infer when you read the stock market reaction, especially in the lodging stocks, on Nov. 16. The average increase was around 10%.
So, yes, an effective vaccine is of course great news, but it will be a while until it is accessible to the individual traveler. Until then, will we see 1 million more infections, and corresponding deaths, per week, for weeks on end this winter — keeping people at home longer still? That question likely caused the stock rally to be short-lived and a week later most of the increase had dissipated.
“Buy the rumor, sell the facts” is the old stock market adage that seems to have been at play here.
3. New STR Forecast
At the virtual NYU conference STR's CEO Amanda Hite presented the latest forecast. The good news is that the forecast got a tiny bit better for 2020. Leisure travel was a little bit stronger than we had expected at our last go-around in August, so we now expect that this year’s RevPAR decline is (slightly) better than -50%.
Our 2021 outlook has not changed much and next year will be written about as the year with the single best RevPAR increase ever. Despite the vaccine news (see above) we did not change our conviction for next year simply because our friends from Tourism Economics, Adam Sacks and Aran Ryan, two of the smartest guys in any room, had already “baked in” news of this sort when we discussed our earlier forecasts. In other words, they always knew that this news would come, they did not know when or through whom, but it was expected and therefore considered.
Despite the corresponding increase in demand, we continue to forecast underwhelming average daily rate increases next year and in the coming years for that matter. It’s hard to see a catalyst for strong pricing power when basically half the rooms in the U.S. stand empty.
4. Segmentation Data
The third time is quite charming indeed and in October the number of group rooms sold topped 1 million again for the third month in a row. It is still hard to fathom any big multinational corporation flying its sales team to a weeklong product kickoff event at a downtown high-rise hotel, so the assumption remains that SMERF (Social, Military, Education, Religious and Fraternal) groups make up a large portion of the count.
In addition, association events also must take place to fund the association’s ongoing business. And there are, of course, some smaller corporations that make meetings happen. But I would think those are few and far between.
Unfortunately, the group rooms sold equate to an actual occupancy of 5% (Five!). RevPAR change in the group space has not moved much from the 90% decline earlier in the year and nothing suggests that the data will get meaningfully better this year or in early 2021. Here are the October results in detail:
5. In-Construction Pipeline
Just like in prior months, the number of U.S. hotel rooms in construction is skewed toward limited service with seven in 10 rooms being built at the lower price point. You might be thinking, “Jan, you say this every month, it’s boring.” Well, here is a slightly different way of looking at that data set: Let’s compare the rooms coming online to the total stock by class and this picture emerges:
Looks like the small count of 13,300 luxury rooms is actually 12% of the existing luxury inventory, so that new supply will matter to future performance. Now, these are weird times (and that is an understatement!) and more than 10% of all luxury rooms are still temporarily closed, hence the “percent of existing” count is likely overstating the reality of the impact.
The way I think about this percent is that I assume the projects at the luxury end take three years to complete. When you do that math in your head, you get a roughly 4% increase per year over the next three years. A year ago, in October 2019, the increase in luxury rooms was around 2.3%. You see what I am getting at: Even though the absolute number of luxury rooms in construction is small, the relative impact on the luxury scale could be material.
For the other classes I divide the “percent of existing” by two, assuming that the hotels will open over the next two years, and you see that the growth rates continue to tell the same story. Upscale branded properties will see a lot of influx, but that is not different from the 4% supply increases over the last few years. Economy hotels are not seeing much competition on the horizon, but that is not really a fair statement since a lot of the competition comes from reflagged properties and in this chart we only look at new-builds. But one takeaway could be that if you have a brand-new economy branded hotel, you may have a competitive advantage.