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Is the Hotel Industry Back to Booming?

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Despite confronting a number of macroeconomic threats last year, the U.S. hotel industry has emerged largely unscathed and is now witnessing rising demand and increasing lodging fundamentals. The recent run in the sector was largely supported by the not-so-robust but still stabilizing job market. 

Other important factors like higher barriers to entry and lower reliance on third-party wholesalers have positioned the hoteliers to attain peak levels once again, not seen since the onset of the global economic crisis in 2007. The hoteliers are putting in all-out efforts to improve their primary performance metrics like occupancy and RevPAR (revenue per available room).

Before the introduction of American Taxpayer Relief act of 2012, automatic tax increases and budget austerities (the so-called budgetary fiscal cliff) forced Americans to cut down on leisure and amusement trips through most of the year.

However, a recent study by PKF Hospitality Research shows that the fiscal cliff notwithstanding, the U.S. hotels have a positive outlook. RevPAR is expected to grow at a CAGR of 7.2% for the next four years, more than doubling the historical average. As per the report, the uncertainties surrounding the fiscal cliff would ease by 2014 giving way to a more optimistic approach from hotel guests, owners and operators alike.

The bullish forecast seems to have pumped fresh blood into the hospitality sector. Hotel owners are investing huge money and driving innovations in the hope of a brighter future. A recent report by CNBC projects an improvement in several metrics in 2013.

The U.S. hospitality sector, specifically in New York, San Francisco, Chicago and Los Angeles, continues to display signs of expansion and growth. Worth mentioning here are Intercontinental Hotels Group plc (IHG - Free Report) , Starwood Hotels & Resorts Worldwide Inc. , Marriott International, Inc. (MAR - Free Report) and Choice Hotels International Inc. (CHH - Free Report) .

The hotel owners believe, apart from improved operating fundamentals, upper-tier lodging segments are expected to achieve an increased RevPAR in 2013, as occupancy levels in these segments have already met or exceeded pre-recession levels.

Will Labor Market Woes Fade the Efforts?

Within this supersector, employment is growing at a rapid pace with investment at its top. Food services and drinking places in fact saw job expansion – increasing by 38,000 in May and by 337,000 over the past year – riding on a robust optimism. 

However, this is a blinkered picture and the situation is very different overall. After four months of improving employment trend, the May job report came as a major blow for the hospitality and leisure industry. The latest monthly economic report released by the U.S. Bureau of Labor Statistics indicates that we are not yet out of the woods.

The number of persons marginally attached to the labor force (persons who want a job, have searched for work during the last 12 months, were available to take a job during the reference week, but had not looked for work in the past 4 weeks)declined sharply by 8.3% on a year-over-year basis to 2.2 million. This is indicative of a still gloomy American economy where people are losing hope once again and giving up their job search. Moreover, the labor force participation rate has declined by 0.4 percentage point over the year.

In Conclusion

It is hard for the leisure and hospitality supersector to hide the dark truth with their outward enthusiasm. As far as the latest job data goes, halfway through 2013, a significant reduction in the unemployment rate looks ambitious.   

We believe the excess demand in the hotel industry, driven by a lack of significant new lodging supply, is far from sustainable. While demand growth has outpaced supply growth in the last few years, the instability in the job market will pose a renewed threat to this booming sector. In light of these factors, high investment in the hotel industry can prove to be too costly.

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