Coronavirus, foreign travelers' coolness toward the U.S., and continued competition from short-term home-rental platforms are combining to make hoteliers uneasy about the outlook for 2020.
The lodging industry, which includes brand companies such as Marriott International Inc. and Hilton Worldwide Holdings Inc. and property owners such as Host Hotels & Resorts Inc. and Park Hotels & Resorts Inc., is typically sensitive to changes in business sentiment because corporate travel represents a significant share of hotel bookings, and operators are able to adjust rates quickly to meet demand.
Industry optimism after the late-2017 passage of U.S. corporate tax cuts has largely faded amid sobering performance numbers. Data provider STR called 2019 a record year for U.S. lodging demand, but the worst year since the last recession for growth in revenue per available room, which rose 0.9% year over year after nine years of growth in the 3% range.
In a Jan. 28 release, STR predicted no growth in U.S. revenue per available room in 2020, lowering its already anemic prediction of 0.5% from November 2019. Amanda Hite, the company's president, said at the Americas Lodging Investment Summit in Los Angeles that high levels of new construction in large cities, combined with additional competition from short-term rental providers such as Airbnb Inc. and Booking Holdings Inc., are hurting hotel operators' ability to raise rates.
"I probably have an unpopular view in the room, but I think the risk is there's a good chance that rate growth is less than what we're forecasting for 2020," Hite said.
Richard Barkham, global chief economist at the commercial real estate services and investment firm CBRE Group Inc., said on a different panel that low hotel revenue growth, at a time of rising costs, means "everybody is going to have to be very cost-focused over the coming year."
"If people aren't going to work every day and focusing in on, 'How can I be more efficient?' then I think they're wasting their time," Barkham said.
The tepid outlook is causing unease across the industry. Stephen Plavin, president and CEO of Blackstone Mortgage Trust Inc., said on an ALIS panel that the percentage of the lender's business dedicated to hotels, historically around 30%, has declined to roughly 18%.
"That's just reflective of the fact that it's become more difficult to be a hotel lender when there's no revenue growth," Plavin said. Weak pricing power and flat performance have been "disappointing," he added, especially considering that the broader property cycle is still near a peak.
Still, lenders may be finding the market more hospitable than equity investors. Several ALIS attendees, including Braemar Hotels & Resorts Inc. President and CEO Richard Stockton, said they have seen property owners abandon plans to sell hotels in the face of weak demand, opting to refinance their debt instead. Mark Schoenholtz, co-head of lodging at Newmark Knight Frank, a capital markets adviser, said the hotel buyer universe shrunk by 5% to 10% in 2019, with equity values falling short of lenders' property appraisals.
Ryan Meliker, president of the newly launched Lodging Analytics Research & Consulting, said in an interview that hoteliers' expenses, driven by higher property taxes and employee wages, are expected to grow by 2% in 2020. Coupled with largely flat revenue growth, that translates to a 4.8% decline in property values for the year, Meliker said.
"We're seeing erosion of the bottom line," RLJ Lodging Trust President and CEO Leslie Hale said on a panel. "I think we're in a profit recession."
Beyond new supply and short-term rentals — challenges that hoteliers have watched unfold steadily over recent years — the industry also faces geopolitical risks. On one panel at ALIS, American Hotel & Lodging Association President Chip Rogers said the United States and Turkey are the only two developed countries in the world to see declines in long-haul inbound travel since 2015.
Besides a strong dollar, the problem "really is about the welcome message that we have here in the U.S. — or should I say the lack of a welcome message here?" Pebblebrook Hotel Trust Chairman, President and CEO Jon Bortz said. "It's lacking under the guise of security, but in fact, the two are not mutually exclusive at the end of the day."
"We get a lot of press on our political environment right now, which I think is negative press, which I hope that people from other countries don't think [is] representative of the people of the United States," Omni Hotels & Resorts President Peter Strebel added.
The conference came as concern was building about the new coronavirus from China. Barkham, from CBRE, said the virus was unlikely to disrupt the global economy. But Mark Woodworth, senior managing director of CBRE Hotels Research, suggested on a separate panel that the Chinese government has understated the death toll of the disease.
"This is not intended to scare anybody, but this is potentially something that could cause a right-hand turn in the road, depending upon just the depth of how bad this thing is," Woodworth said. "We have seen from Zika, and other things in our past, that it can have a very quick and sizable negative impact."
Asked about the biggest risk to hotels in 2020, he replied, simply, "The virus."