Hoteliers, analysts and investors aren’t quite sure what to expect of the hotel industry’s performance in 2016 and beyond.
But what could previous declines tell us about what to expect when the industry does finally trend downward?
There is a disconnect out there in the hospitality industry, one that is borne out of timing.
The industry is very likely at or near this cycle’s peak, which makes many people very, very scared. So while the fundamentals of the industry are—for the most part—the best of our lifetimes, Wall Street analysts are skittish and pointing out the looming bear economy headed our way.
So what’s the issue?
There are a lot of sub-issues at play, but overall, the main issue is no one knows what happens next, and that freaks people out. When the hotel economy was in its recovery phase, it was (relatively) easy to forecast continued short-term growth as long as the primary influencers on hotel demand were behaving. But after months and months of continued record-breaking performance in the industry, many people question how long this pace can be sustained.
It makes me think of launching model rockets with my kids.
At the apex of the rocket’s trajectory, I’d helplessly stare up and hope the chute would deploy. Most of the time it did, and the rocket floated gently back to the earth. Once in a while it didn’t, and the rocket smashed into tiny bits on the ground.
In 2009, the chute didn’t deploy for the hotel industry. Nor did it in 2001.
A Wall Street banker asked me the other day, “has the hotel industry ever not crashed?” Meaning, has there even been a mild correction to growth–a gentle float back to the earth–before a new period of expansion? Consider this very basic chart:
The dips in 2001 and 2009 are apparent, where revenue per available room declined 11.3% and 19.6% from the previous peaks, respectively. If you define a 10% drop in RevPAR as a crash for the hotel industry, these periods both qualify.
The crash of 2001 saw 21 months of consecutive RevPAR declines, and the 2009 crash (which technically started at the end of 2008), saw 22 straight months of decreases.
Prior to that, the only running 12-month decline in RevPAR was a 14-month period spanning March 1991 through April 1992.
The junk bond market flamed out, Michael Milken was newly in jail and the Resolution Trust Corporation was liquidating the assets of all those failed savings and loan associations, many of which held hotels on their balance sheets.
The U.S. economy was in the tank, but the hotel economy, at least its topline performance, didn’t crash. In fact, from the previous peak to the trough of that particular downturn, RevPAR lost exactly one dollar. That one dollar represented a total drop of 2.7%, a far cry from the declines in 2001 and 2009.
Some would call this more of a controlled landing. In other words, the chute deployed.
So what’s waiting for us in the next few years?
Here are seven reasons hotel analysts are afraid, along with my take on what’s happening: