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After A Decade Of Growth And Recovery, What’s Next? | By Joseph Pierce

12 March 2020
After A Decade Of Growth And Recovery, What’s Next?
After A Decade Of Growth And Recovery, What’s Next?
After A Decade Of Growth And Recovery, What’s Next?
After A Decade Of Growth And Recovery, What’s Next?
After A Decade Of Growth And Recovery, What’s Next?
After A Decade Of Growth And Recovery, What’s Next?

Looking back at the past always helps to give an indication of what the future may hold. The hotel industry has shown tremendous growth in all metrics since 2009.

Forecasts show occupancy levels starting to decline while demand and supply level and ADR will grow. The consolidation of brand companies and new brand offerings that occurred in the past decade will continue. Labor issues have been the major downside of the industry's growth.

For the hotel industry, the 2010s began with one of the worst economic periods in our nation's history—the Great Recession—and were succeeded by a period of strong growth. While economists will note that the recession ended in June 2009, they also acknowledge that such a conclusion does not occur evenly over all market segments, industries and regions. That acknowledgment held true for the hotel industry as its metrics climbed back from some the worst performance levels ever recorded as hotel brands carried on with robust expanded offerings, and as labor shortages and retention issues come to the forefront of an industry on the upswing.

Occupancy, ADR and supply
For the hotel industry, 2008 and 2009 saw sharp declines in occupancy, with 2009 ADR declining by 8.8% according to STR. As shown in the following table, while ADR would need at least one more year before it would begin to recover, occupancy began a consistent march upwards to a record high in 2018 and matched in 2019.

After A Decade Of Growth And Recovery, What’s Next?
After A Decade Of Growth And Recovery, What’s Next?

The growth in occupancy has been aided by a number of factors. The United States economy set a record for economic expansion on July 1, 2019, and that trend continued through the third quarter of 2019. Record low unemployment and a consumer-driven economy has helped drive the industry's growth. But another significant factor is the growth in supply of hotel rooms.

After A Decade Of Growth And Recovery, What’s Next?
After A Decade Of Growth And Recovery, What’s Next?

Since 2009, the supply of available hotel guestrooms has increased an average of 1.2% per year while occupancy has increased an average of 2% per year. As the previous table shows, the supply of available hotel guestrooms grew only modestly from 2010 through 2014 while occupancy demand grew at a stronger pace. However, from 2015 through 2019, occupancy has increased an average of only 0.3% per year while the growth of available guestrooms grew an average of 1.8% per year.

Hotel brand expansions
As global hotel brands recognized the need to expand beyond their base of loyal customers, this past decade saw a wave of mergers and acquisitions. The most noted merger was Marriott International's acquisition of Starwood Hotels & Resorts Worldwide, but it was only one of many. M&A activity, which allowed brands to expand their footprints geographically and through different classes of properties, spanned from luxury brands to economy brands, and from North America to Africa and Australia.

As the M&A activity shows, global brands have recognized the need to expand their offerings. It is no longer enough to offer simply a full-service hotel, limited-service hotel and extended-stay property. Different generations have different expectations and demand different experiences. The evolution of boutique hotels and lifestyle properties are merely subsets of broader hotel categories and can be further parsed to reflect specific travel needs and desires.

Major hotel brands also reached out to independent properties this past decade. The development of collection brands, which bring independent hotels into a major chain's system, affords an independent property the benefits of a global reservation system and loyalty program without compromising its historic identity.

A number of franchisors realigned their brand concepts to target a broader range of guests. Best Western was an example of this strategy when in 2011 it introduced the Best Western Plus and Best Western Premier to the North American market. The following table identifies the number of brands that were introduced in the past decade in various segments.

After A Decade Of Growth And Recovery, What’s Next?
After A Decade Of Growth And Recovery, What’s Next?

In addition to the introduction of new brands, the development of multiple-branded hotels on shared sites has been on the rise. This concept is attractive to developers as offering multiple brands gives the opportunity to attract a wider range of customers to the same location while experiencing potentially lower operations costs.

Labor costs and shortages
The robust economy, however, was not without its downside for the industry on some levels. Record-low unemployment created a labor shortage for many positions within a number of hotel markets across the U.S. Labor retention became an acute problem industrywide. With average occupancy at an all-time high for hotels across the U.S., there are more guests than ever to attend to, but with fewer hospitality workers available to help them.

In addition to labor shortages, the continued increase in the minimum wage over the past several years has profoundly affected labor costs industrywide. In 2017, 21 states passed minimum-wage laws, followed by another 18 states in 2018. To combat these rising minimum wages, owners increased the rate of adoption of technology to help increase operational efficiency and reduce the numbers of employees needed to operate their property. In addition to mobile check-in and digital keys, hotel companies have started experimenting with robots to deliver items to rooms and act as a concierge.

What the past means for the future
What does this mean as we head into the next decade? As noted, while occupancy growth has slowed and possibly stopped, the growth in supply continues on. This suggests occupancy will likely decline in 2020. Should this happen, it would be the first step back in a decade. However, the decline in occupancy percentage will occur while actual demand grows due to the continued strength of the consumer market as continued record-low unemployment and rising wages are providing consumers with disposable income that is making its way into the hotel industry.

The growth of new brands will continue into 2020 and beyond with Hilton announcing Tempo, the franchisor's 18th brand, and Choice Hotels International announcing its newest midscale extended-stay brand, EverHome Suites.

As long as unemployment remains low, labor shortages for many positions will continue within a number of hotel markets across the U.S. Likewise, labor retention issues will remain a concern as 20 states increased their minimum wage as of 1 January, with Connecticut, Delaware, Nevada and Oregon set to increase their requirements later in the year. However, hoteliers need to consider the cost of retention associated with higher wages, which may be a more palatable number than the cost of hiring and training.

Coming off the wake of the Great Recession, the 2010s were an exciting decade for growth, development and even consolidation for the hotel industry, which should be seen carried through to 2020 and beyond. With a robust economy, low unemployment and the prospect of continued supply growth, the industry is poised for another exciting decade.

This article was originally published on Hotel News Now.

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Contact

Joseph Pierce
Senior Associate
Email: jpierce@hladvisors.com

Organization

Hotel & Leisure Advisors
www.hladvisors.com
14805 Detroit Avenue | Suite 420
USA - Cleveland, OH 44107-3921
Phone: 216-228-7000
Fax: 216-228-7320
Email: dsangree@hladvisors.com

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