U.S. hotel market in Q1 did better than expected

NATIONAL REPORT—The U.S. hotel market in Q1 2018 did better than forecasted. RevPAR within the industry increased, as did occupancy and ADR. On the development side, several markets are promising, and 2019 is expected to be another great year.

“Industry fundamentals remain very much in balance across the vast majority of markets,” said Mark Woodworth, senior managing director, head of lodging research for CBRE Hotels’ Americas Research. “Elevated levels of consumer and business confidence, fueled by the passage of tax cuts late last year, led to stronger demand growth than anticipated for the first half of 2018.”

The hotel market had a strong Q1 performance. According to research published by  CBRE Hotels’ Americas Research, U.S. hotels witnessed a 3.5% increase in RevPAR in Q1, a full percentage point greater than the 2.5% RevPAR gain expected for the quarter. Because of this, CBRE is now forecasting a 2.8% jump in RevPAR for U.S. hotels this year. This RevPAR gain is the result of a 0.1% increase in occupancy and 2.7% rise in ADR during the same period.

With regard to RevPAR in Q1, the industry witnessed the greatest gains at either end of the chain-scale spectrum. During this time period, luxury hotels saw a RevPAR increase of 6.6%. “Strong performance in the luxury category is attributed to both the enactment of the tax cuts and the significant gains in both the stock market and home prices,” he said. “The resulting positive ‘wealth effect’ led to greater levels of travel and spending on luxury goods, including hotels.” CBRE expects this performance trend will continue and is forecasting a 6.1% RevPAR increase in the luxury segment for 2018.

The economy segment saw a 5.3% boost in RevPAR in Q1. “For economy hotels, employment gains contributed to more demand for more affordable lodgings,” Woodworth said. “The absence of any meaningful supply growth in the economy tier also enables operators to be aggressive with their rate strategies.” Economy hotels are expected to see a 4.4% boost in RevPAR for the remainder of 2018, according to CBRE.

RevPAR growth is expected to slow down in both segments in 2019. “New supply and the likelihood of a softening economy in 2020 should serve to undermine demand growth in the back half of 2019 and throughout 2020,” he said, commenting on the luxury segment’s RevPAR growth in the coming years. For luxury properties, CBRE is forecasting only a 2.2% increase in RevPAR for 2019 and a decrease of 1% in 2020.

Economy properties are expected to witness a 3.1% increase in RevPAR in 2019 and a jump of 3.1% in 2020. As for why, Woodworth pointed to the same reasons he gave for luxury properties. He then added the following: “Changes in employment correlate very closely with changes in demand for lower-priced hotels.” Employment growth is forecast to be 1.6% in 2018, 1.% in 2019 and “to contract by 0.2% in 2020,” he said.

Still, the greatest challenge for the industry is labor. “The low unemployment rate in the vast majority of markets, combined with the continued opening of new hotels, has, and will continue to, drive up the cost of labor,” Woodworth said. According to the Bureau of Labor Statistics, the national unemployment rate held steady at 4.1% in Q1.

The hotel market nationally saw a 0.9% increase in occupancy and a 2.5% jump in ADR in Q1 2018, CBRE’s report revealed. Over the next four quarters, occupancy is expected to remain at 66.1%, above the long-run average of 62.3%. ADR is expected to witness an increase of 3.1% (above the long-run average of 3%) during the same time period.

The construction industry continues to be busy. “We continue to depend on strong relationships within the construction community to get projects completed properly and on time,” said Erik Rowen, president of development and renovation services at McKibbon Hospitality. While the hotel development firm is always concerned about markets becoming overbuilt, in the markets it’s working in, supply is still being absorbed.

Nationally, both supply and demand were up in Q1 2018, according to CBRE. The market witnessed a 2% increase in supply and a 3% boost in demand in the first quarter. The research firm is forecasting a 2% increase in supply and a 2.1% increase in demand for 2018. The market is expected to experience this pace in the following years.

“We expect 2018 to finish out strong,” Woodworth said. “In terms of top markets, cities in general are seeing the most growth for us. This is being driven by millennial travelers as well as baby boomers, both of whom are seeking unique foodie and entertainment experiences in urban areas.”

As for popular development markets, in Q1 2018, three markets opened six hotels each and one opened five hotels, according to Lodging Econometrics. These growing markets are as follows: Atlanta (six hotels with 944 rooms); Houston (six hotels with 802 rooms); Kansas City, MO (six hotels with 564 rooms); and Los Angeles (five hotels with 744 rooms).

“Atlanta and Los Angeles both have diverse economic demand generators and can be considered gateways into the United States,” said J.P. Ford, SVP and director of business development at Lodging Econometrics. “Much of the development in Houston is centered around oil-and-gas-related demand.”

Many analysts expect 2019 to be another good year for the U.S. hotel market. “We are forecasting occupancy levels to reach an all-time high,” Woodworth said. “Concerns about the economy will mitigate ADR growth in many markets, and continued increases in the cost of labor will make realizing an attractive increase on the bottom-line profit a real challenge for most.”

Another high point, CBRE is forecasting a 0.2% gain in occupancy in 2019, marking the 10th consecutive year of occupancy growth in the U.S.

There are some who believe it’s still too early to predict what 2019 holds for the lodging industry. “The balance of 2018 looks to be more of the same,” Ford said; however, the analyst did do his best to answer one of the most frequently asked industry questions.

“If we continue along current trend lines, then we are forecasting a 2.4-2.5% increase in new supply for 2019,” he said. “Many people like to use a baseball analogy when referring to where the industry is in this growth cycle and, oftentimes, people want to know, ‘What inning we are in?’ To me, it seems like we are somewhere in the second game of a doubleheader.” HB