Predicting hotel industry’s profitability in 2018

2017 was a stronger year for demand than expected, and that could mean good news for the hotel industry’s earning potential this year, according to new research from Moody’s.

Last year, demand for U.S. hotels grew 2.7 percent compared to 2016, according to STR data. That figure was above Moody’s forecast of 1.5 percent of demand growth. The research attributes the robust growth to strong consumer sentiment and modest average-daily-rate growth of 2.1 percent. Meanwhile, higher occupancy rates resulted in revenue-per-available-room growth of 3 percent in 2017, which was at the high end of Moody’s forecast of 1 percent to 3 percent.

“If consumer confidence and other macroeconomic trends continue to be positive, demand could remain high and drive higher occupancy, leading to higher than expected [earnings before interest, taxes, depreciation and amortization] growth in 2018,” according to the report. “Stronger-than-expected 2017 points to potentially better 2018 earnings growth.”

Various macroeconomic trends could lead the way to those higher earnings this year, according to the research. For instance, unemployment remains low while the stock market breaks records (despite this week's volatile swings) and consumer confidence is high. Additionally, real median household income in the U.S. is expected to grow for the third year in a row.

The high level of consumer confidence is certainly showing in travel spending, according to a recent survey by Allianz Travel. Summer vacation spending grew 12.5 percent in 2017, which was the second year in a row that spending had seen an increase. Moody’s researchers note that this growth helped to increase occupancy 0.9 percent in 2017, despite the metric already being at a record high.

However, nothing is perfect, and the industry could face some headwinds this year.

Lower inbound travel to the U.S. could become an issue in 2018. Visitors traveling to the U.S. from the top 15 tourist-generating countries declined in 2015 and 2016. When data is crunched for 2017, it could show a continuation of that trend. For instance, 2016 saw a 2.9-percent decrease in the number of visitors from 2015. When examining the 2017 data available through July, visitation to the U.S. was down 2.3 percent already.

“Whether this is due to fluctuations in the strength of the dollar or the general political climate in the U.S., a continuation of this trend would create a headwind for the industry,” the report reads.

Supply in the U.S. also is expected to grow in 2018. While supply growth in 2018 is forecast to be below historical levels at 2 percent, the anticipated growth is an increase from 2014’s 1 percent.

Supply will mostly grow in the upscale and upper-midscale select-service segments as well as urban locations. In 2017, the upscale and upper-midscale segments grew 4.3 percent and 4 percent, respectively, according to STR. By comparison, total U.S. hotel rooms grew 1.8 percent.

“Part of the drive to build new limited-service hotels is the ability to build these relatively smaller-sized hotels in densely populated urban settings,” according to Moody’s. “Hotel room growth in urban settings has outpaced suburban and other locations since early 2013, and grew 3.1 percent in 2017 versus 1.9 percent for suburban hotel rooms.”