COLUMBUS, Ohio—The United States hotel industry has posted consistent growth for a number of years, but that’s not to say the road ahead is devoid of bumps or potholes. There are a number of roadblocks that historically have derailed similar recoveries in the past.
Will they do so again this cycle? On Friday, Mark Woodworth, president of PKF Hospitality Research, analyzed five potential barriers to growth during the RockBridge Rock the Road event at the Sheraton Columbus Hotel at Capitol Square.
1. Economic slowdown
If the economy contracts, demand shrinks and “bad things happen,” Woodworth said.
Business and consumer spending are crucial for growth in the hotel industry. According to Moody’s Analytics, those two factors are poised to drive gross domestic product growth for the foreseeable future, “which is a good thing.”
The diminishing pace of demand is a concern, Woodworth said, but the historically low levels of supply growth are working in hoteliers’ favor.
“We’re getting into that part of the cycle where we would expect … to see prices really ratcheting up as managers take advantage of that imbalance of supply and demand can maybe charge more for their product,” he said.
“The momentum is now accelerating and is going to push us into 2014 for a very, very good year for hotels.”
2. Overbuilding
When analyzing pipeline data from STR, parent company of Hotel News Now, Woodworth pointed not to the 28.1% increase in projects under construction but rather the 18.2% decrease in projects in pre-planning.
“It’s fairly important that the first stage of development is down over 18%. That’s actually a very good thing,” he said, adding that less supply means less competition and pressure on rates.
He also noted property values have been flat, which means it’s harder to justify new construction.
However, the supply outlook varies by market, Woodworth noted.
3. Unpredictable demand shocks
There have been two in the past 15 years, he said. The first came after 9/11, during which demand decreases bottomed out at approximately -15%.
The second came more recently during the Great Recession.
“Nobody can anticipate that,” Woodworth said. “That’s all part of the risk that we have to deal with.”
4. Oil and energy prices
Citing data from the International Energy Agency, Woodworth said the growth of oil supply will outpace the growth in demand for oil.
That can only mean one thing: spare capacity and a downward pressure on oil prices, which will continue to materialize as lower energy prices for operators.
5. Asset price bubble
“If you can only watch one thing, watch home prices. As go home prices, so goes the economy. And so goes the economy, so goes our industry,” Woodworth said.
Housing prices have notched some gains in the past year, according to the Case Shiller National Home Price Index. But they’re nowhere near where they were during the 2007 bubble.
Still, Woodworth and the PKF team are keeping a careful eye on this metric.
“We’re watching this most closely. There could be a bubble. A lot of it has to do with what’s going on with interest rates,” he said.