• US mid-market to reach new peak in 2015

The mid-market sector in the US is about to see a surge in demand, according to the latest forecast from PwC US.

The company said that it expected to see occupancy levels in the lower-priced chain segments approach or exceed prior peak levels in 2015, with the new supply coming into the market focused on higher-priced hotels.

This year PwC forecast an increase in demand of 4.0%, which, combined with still-restrained supply growth of 1.0%, was expected to boost occupancy levels to 64.1%. Revpar is expected to see a 7.6% rise.

Next year the group said that it expected accelerating supply growth of 1.6%, as construction of new hotels gathered momentum (up over 50% in the second quarter, compared to the same quarter last year), with supply growth in the higher-priced chain scale segments outpacing growth in the lower-priced segments.

Occupancy was expected to reach 64.8% in 2015, the highest since 1995, which in turn was expected to give operators more confidence to push for higher room rates.

PwC said that it had seen travel activity pick up “significantly” in the second quarter, resulting in better than expected occupancy performance, and average daily rate results that were only slightly less than anticipated.

While transient travel – both commercial and leisure – continued to show steady gains, hoteliers were reporting strong trends in the group segment, which still has room to recover to peak levels.

“The strengthening of the group segment thus far in 2014 and a strong summer travel season across all price points is encouraging for future occupancy levels and continued industry growth,” said Scott D. Berman, principal and US industry leader, hospitality & leisure. “We will be closely monitoring the industry’s third quarter results to evaluate any change in momentum.”

The estimates were based on an updated forecast released by Macroeconomic Advisers in August and historical statistics supplied by Smith Travel Research and other data providers. PwC used its own proprietary models to deliver the forecasts. Macroeconomic Advisers forecast a 2.0% increase in GDP this year, accelerating to 3.1% growth in 2015.

The forecasts have been echoed in the most-recent results season, with operators raising their revpar guidance. Marriott International increased its worldwide full year revpar guidance to 5% to 7%, against previous forecasts of 4.5% to 6.5%, with president & CEO Arne Sorenson telling analysts at the group’s second quarter earnings call: “We’re at very high occupancy levels. And the higher they get, the more ability we’ll have to drive rate.”

Sorenson reassured investors that there was no need to “panic” about the “tremendous” growth in the company’s North America pipeline. The group’s development pipeline of under construction, signed or approved rooms was up 37% on the year to nearly 215,000 rooms at the end of the second quarter, of which 50% were in the US and about 50% overseas. Sorenson focused on the North American limited service pipeline, which increased by 23,000 rooms over the past year, reaching 96,000 rooms.

Sorenson said: “Despite this tremendous North American growth, there is no need to panic. We don’t believe the strength of our North American pipeline is an indication of an overcharged industry supply…rather, it is our market share that is expanding.”

Sorenson said that the CMBS market was stronger, with financing easier to find, which would fuel greater new hotel development, but that it would still take “years” for the new hotels to open. In the meantime, he said, “supply growth is modest. In our view, we are only midway through this cycle in North America”.

At Starwood Hotels & Resorts the company forecast that revpar growth in North America would be towards the upper end of its guidance range of 5% to 7% for the third quarter, with president & CEO Frits van Paasschen commenting that supply growth in both luxury and upper upscale remained low “which means we should be able to drive rate increases as demand grows”.

The company was not solely focused on the top end of the market, with Van Paaschen taking the opportunity to describe the company as “the smaller player” in what the US market calls the select serve market and the rest of the world calls three or four star. He said: “We have many hundreds fewer select serve hotels than some of our competitors and therefore we think it’s plenty of opportunity to grow.”

The latest forecast from PwC suggests that this would be an opportunity indeed.

 

HA Perspective [by Chris Bown]: Quarterly results presentations have heard a succession of big brand CEOs predict this moment, with demand rising but precious little supply; and corporate group bookings returning with vigour. Those CEOs will be happy to reap the revpar benefits, while waiting for the banks to make up with the construction sector, so that hotel development can build scale once more. Even now, Sorenson is predicting no great change in the short term.

But brands need to tread a fine line between what appears best for the bottom line right now, and what could do longer term damage. As long as they pursue an asset-light approach, they are reliant on the broken banks fixing themselves, before supply improves.

The problem is, never mind how good the loyalty programme, if guests get bumped due to a full hotel, that loyalty gets challenged. Guests are also getting fed up with prices that continue to rise, in real terms. A January Market Matrix report on hotel customer satisfaction cited strengthening occupancy and higher prices as reasons behind a drop in satisfaction scores in the US and Europe. And in April, the American Customer Satisfaction Index also noted a decline in satisfaction, saying that hotel guests felt while prices had risen, the amenities the hotels provided had not improved. 

Hotels need to be careful, as the sharing economy – and in particular Airbnb – is getting its act together. Increasingly, it is ready to offer a suitable alternative to the bumped hotel guest. 

 

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