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This Will Be Record Year for Hotel RevPar, Occupancy, Says STR’s Freitag

Jan Freitag, senior vice president of hospitality insights at research firm STR, provides a "state of the union" presentation at the Hunter Hotel Conference in Atlanta on March 22.

Jan Freitag, senior vice president of hospitality insights at research firm STR, provides a "state of the union" presentation at the Hunter Hotel Conference in Atlanta on March 22.

ATLANTA — American hotels posted record levels of revenue per available room (RevPAR) and occupancy in 2017. According to one industry researcher who recently spoke at a national hotel conference, 2018 is shaping up to be even better.

Jan Freitag, senior vice president of lodging insights at Tennessee-based research firm STR, was the first panelist to deliver a “state of the union” presentation at the Hunter Hotel Conference. The event drew 1,700 industry experts to downtown Atlanta on March 22.

Freitag noted that the U.S. hotel sector closed 2017 with RevPAR of $84 and an occupancy rate of 66 percent. These figures represent year-over-year increases of 3.1 percent and 1 percent, respectively.

Both of these metrics are functions of demand for hotel rooms, which rose by 3 percent from 2016 to 2017. STR’s data projects a 2.3 percent increase in demand for hotel rooms in 2018. Specifically, the company forecasts RevPAR growth of 2.7 percent and occupancy growth of 0.3 percent in 2018.

What Happened in 2017

Freitag opened his discussion by noting that growth in demand for hotels in 2017 was tied to Hurricanes Irma and Harvey, which accounted for more than $130 billion in combined property damages. RevPAR for hotels in Florida and Texas grew by 7.4 percent and 5.8 percent, respectively, solidifying the industry’s role as a lifeboat in times of natural disaster. Without the RevPAR gains of these two states, the metric would only have risen by 2.8 percent in 2017, according to Freitag’s data.

On the occupancy front, Freitag pointed out that at face value, the 66 percent occupancy rate means that only two out of every three hotel rooms are occupied every night. But for top markets on busier nights — Tuesday through Saturday — the occupancy rate is likely to be above 70 percent.

“The annualized demand growth surprised everybody,” said Freitag. “Last year was an extreme year, but it wasn’t an outlier — it’s part of a trend.”

There were some negative metrics in 2017, however. Revenues were up for the year, but so too were operating costs, mainly in the form of labor. As such, the industry faces concerns of sustained profitability.

According to Freitag, the key metric to follow in terms of profitability is average daily rate (ADR).

“Real ADR growth has been close to zero or negative for three straight quarters,” he said. “That means profitability in the industry is deteriorating because expenses are absolutely on the rise.”

What’s On Deck for 2018

With the passing of the Tax Cuts and Jobs Act in late 2017, Americans are poised to have more disposable income for travel and leisure. Consequently, industry forecasters and data analysts expect overall demand to rise in 2018.

In addition, the pipeline for construction of new hotels is beginning to level off. There were approximately 193,000 hotel rooms under construction at the beginning of the year, according to STR’s data. That volume of new units under construction has declined on a monthly basis for six straight months.

“This decline in new development really speaks to the health of the industry,” said Freitag. “We don’t see the industry overbuilding or suffering from a self-inflicted gunshot wound like it has in the past.”

Among hotels under construction, roughly 70 percent are limited-service properties, a category that includes economy, midscale and upscale assets. According to Freitag, both consumers and major hotel operators see the upscale to upper-midscale segment as the market’s current sweet spot. From a developer’s perspective, this is because rising construction costs make it impractical to build luxury hotels outside of top-tier markets.

The 10-Year Disruptor

There is a single force that could derail future growth in demand and RevPAR in 2018, and it comes in a very familiar form.

Since it was founded in August 2008, Airbnb has continued to eat up market share in the hospitality sector. The website and app allows consumers to rent rooms at private homes for a cheaper price than staying at a hotel. Freitag estimated that the online lodging service now holds approximately 10 percent of a $45 billion market.

Airbnb recently announced plans to enter the boutique hospitality space. As part of this move, the San Francisco-based company will list boutique hotel rooms on its platform. CEO Brian Chesky recently confirmed that more than 15,000 boutique hotels have begun marketing rooms through the company, despite being competitors.

This “if you can’t beat them, join them” strategy has the potential to be a game-changer, said Freitag, because of the domino effect inherent to it. Once a few boutique hotels are listed and sold quickly on the millennial-friendly platform, entire hotels will begin to be featured. Eventually, he added hotel owners may look to the major hotel parent companies to market their entire chain on Airbnb.

 

“To be honest with you ladies, and gentlemen, I think this is going to rock our world,” said Freitag.

 

— Taylor Williams

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