Despite softening of hotel demand increases in the first half of this year, top hotel executives and analysts at last week's New York University's 29th Annual International Hospitality Industry Investment Conference were bullish that the industry would retain its strength for the next few years and beyond.
InterContinental Hotels Group CEO Andrew Cosslett told the few thousand hospitality investors and analysts in attendance that he expects the industry to be strong through the next decade at least, as new factors in travel have disrupted the usual up-and-down motion of the industry's cycle. These generational shifts, as he called them, give the hotel industry a chance to prolong its potency, he said. "Every cycle has an end, but we're in a different place, and there's definitely some things happening in the world," Cosslett said. "We didn't have the Internet, we didn't have 100 million Chinese people about to arrive on the world travel scene and we didn't have people with 10 years more life expectancy and more money."
Decreased demand affected hotel performance earlier this year. Marriott International, for example, slightly lowered its 2007 revenue projections after its first-quarter revenue per available room in North America increased by a little less than its earlier growth projections
(BTN, May 7). Much of that impact was blamed on the increased demand and decreased supply in the early months of 2006 following Hurricane Katrina. Mark Lomanno, president of Smith Travel Research, said that most industry indicators pointed to that turning around throughout the rest of the year, however.
"Demand had been negative for a period of time, but that is beginning to change and will get much better as the year progresses," according to Lomanno. "Everyone should have been more concerned six months ago than they were about the force of the industry and less than they are now."
One of the key indicators, he said, comes from observing the top 25 hotel markets. Usually, prior to an industry downturn, those markets deteriorate the fastest, but they currently remain as strong as ever, he said.
"There's little or no evidence that premium is beginning to erode," Lomanno said. "If it was, group travel would be slowing down a little bit, but that isn't happening."
Kathleen Taylor, president and COO of Four Seasons Hotels and Resorts, reaffirmed her company's earlier predictions of annual RevPAR growth of between 9 percent and 11 percent, above the record levels seen last year.
"We're doing very well," she said. "We are comfortably on track to meet those expectations and looking for a good second half."
The executives had little concern that the additional supply in hotels' development pipelines would significantly slow rate growth, particularly as hotels get a better grasp of controlling supply and demand. "People are very focused on that today in a way that they haven't been for the last 25 years," Taylor said.
Smith Travel Research in the past few weeks lowered its supply growth expectations to 1.2 percent from 1.4 percent, and Lomanno agreed the a renewed supply source would not be a source of relief to corporate travel buyers dealing with escalating negotiated rates.
One reason is that the hotel construction pipeline is becoming elongated. While the time from groundbreaking to opening took an average of a year in 2001 and 2002, that process now averages 19 months, Lomanno said. In addition, most of the new construction is not taking place within tiers or markets where demand is the strongest.
Thomas Baltimore Jr., president of real estate firm RLJ Development, one of the largest U.S. Marriott and Hilton franchise owners, said the slow rate of new hotel projects in urban markets also would lengthen the cycle in the hoteliers' favor. "Conditions are still favorable, particularly when you're looking at urban markets, so I think that means at least another strong three years, maybe even seven," Baltimore said.
Domestic growth continues to be the focus for major hotel companies. IHG's Cosslett said that despite growth markets in India and China, the U.S. market would remain "the dynamo for growth for the next 20 years."
Hotels also are in the process of closing a lot of rooms even as they open more, according to Lomanno, so hearty construction pipelines do not mean a hearty supply increase.