LARC's Ryan Meliker talks...
- Pent up demand during the U.S. Election
- Economic uncertainty and impact on corporate travel volume
- Office utilization status and projections on corporate travel demand
In its latest U.S.
hotel forecast, Lodging Analytics Research & Consulting this month
projected overall growth in 2025 and "modest" corporate transient,
with near-term strength moderating as the year progresses. LARC president and
co-founder Ryan Meliker on March 17 expanded on the forecast with BTN managing
editor Chris Davis, detailing some of the key drivers of corporate demand and
assessing how the current market volatility could translate to corporates'
travel plans. Edited excerpts follow.
BTN: Leaving aside some of the recent turbulence in
the economy, in your most recent forecast, you projected near-term corporate
demand would remain pretty solid but as the year went on to show a bit more
softness. What led you to that conclusion?
Ryan Meliker: There's a couple of factors. No. 1,
whenever we have a general election as we had in November, there is kind of a
pullback in demand, because of uncertainty leading into that election. We
certainly saw it in the third quarter and early fourth quarter. However, as the
general election was swiftly resolved, things weren't put on hold for a month
as if we were trying to figure out who was going to win. [The result] wasn't
nearly as close as maybe people thought it could be. And then there was this
exuberance, especially from the corporate side, that, hey, this is great for
the economy and things are going to be really, really strong.
Looking at STR data, November
and December
were gangbusters, two of the best months of the year as we came out of the
general election. January
came in really strong as well. February
was a little softer, but some of that was weather-related. Put all that
together, and that leads to some tailwinds on a year-over-year basis for
corporate transient demand because there was a level of pent-up demand going
into the election that then was swiftly resolved.
As we look beyond the next month or so, our concern is tied
to what we're seeing in some of the primary macro factors that have
historically driven corporate demand, like corporate profit growth and stock
market appreciation. When companies are making more money, they're more
inclined to spend money. When companies' stocks are at high multiples, they try
to adjust by generating outsized revenue growth. Both of those things tend to
lead to more corporate transient demand. However, when the opposite is happening,
as is the case now, you see a pullback, and it's not necessarily in real time.
Sometimes there can be several months of lag, and that's why we are concerned
as we move through this year that we're going to see corporate transient demand
growth moderate. We're still not saying it's going to be negative, just not a
lot of growth.
BTN: A slowdown in growth was your projection even
before this most recent pullback in stock market. Given the scale of that
pullback, how sharp a reaction could there be in terms of demand?
Meliker: It's hard to say because we don't know. Just
because we saw a big pullback last week doesn't mean you're not going to see a
rally next week. You have to look at data over time and see how things will
evolve.
I think the challenge that we have right now is that we have
an administration that is willing to negotiate publicly through the media, and
I'm not saying what they're doing is wrong, but it creates a tremendous amount
of uncertainty, and it creates unease in the corporate environment and unease
in the stock market. If that settles down, the stock market will settle down
and all of those dynamics will moderate. I think we're at the of peak of those
dynamics right now, where President Trump is trying to get the tariffs
straightened out. So could it persist for another month or two? Absolutely.
Could it be done this week? It totally could be. We don't know.
BTN: In the same vein, your forecast uses the Moody's
projection of 2.5 percent growth for the U.S. gross domestic product for Q1.
But some projections have since been lowered, including the Federal Reserve
Bank of Atlanta, which
now projects a 2.1 percent decline for Q1. If something like that comes to
pass, would that have a more immediate effect on corporate transient demand?
Meliker: Probably, because it would make companies a
little bit more concerned. Now, the consensus view is not negative GDP in the
first quarter. I think that is very much an outlying estimate. But look,
there's risk. None of this is ever perfect. Forecasting, as we always say, is
never an exact science. It's about trying to use the best available information
we have and the best process we have to make the most informed decision.
It would obviously have a negative effect if we saw a
negative GDP growth, whether it's down 0.2 or 2, that is an indication of a
recession. That is definitely not the view that I think most people have today.
And we've seen a huge decoupling between GDP growth and hotel performance. I'm
not sure it necessarily translates into a very swift reaction if it's just
slower growth than that 2.5 percent level. If it's negative, it signals a
recession, and that would probably have a pretty negative impact on corporations
and their willingness to spend.
BTN: You've talked about how revenue per available
room historically tracked GDP through 2020 and has since decoupled. What's
behind that? Why do you think that figure has decoupled as dramatically as it
has?
Meliker: There's a couple components to it, and I
wish I knew exactly all of it. I have hypotheses, but you never really know.
I think it's driven by a couple of different things. No. 1
is that post-pandemic we've seen the consumer has really supported the economy
rather than corporate growth. And that has led to a dynamic that's not
necessarily aligned with overall hotel performance, because corporate demand is
still the vast majority of hotel demand. The second component is the consumer
coming out of the pandemic had a tremendous amount of pent-up demand for travel
abroad. You saw this massive outbound influx of travel that was not matched by
inbound.
Do I think that decoupling is permanent? Absolutely not. But
I think that there are dynamics that have shifted right now, and until they
shift back we're still going to see things a little bit disparate from where
they've historically been.
BTN: If you're a hotelier, do you see the leisure/corporate
demand mix changing now?
Meliker: I think it already has. In 2022 and 2023,
leisure demand shot back up out of the pandemic, and corporate demand has been
much slower to recover. We still haven't fully recovered corporate transient
demand to pre-pandemic levels. I'm not sure we will.
It's something that we talk about a lot: Hotel corporate
demand isn't back to 2019 levels, but for two years airlines have talked about
how their corporate demand is above pre-pandemic levels. How is this the case? And
the answer is people aren't in the office as frequently as they were before. So
instead of a three-day business trip where you saw clients on three straight
days and stayed overnight two nights, it's a two-day trip and only staying in
the hotel one night. Your flights are the same, but you're only staying
overnight one night.
Office utilization levels have been a huge factor that have
limited corporate transient demand. I am not of the view that we're going to
see office utilization return to pre-pandemic levels, because I think there's a
level of flexibility that's been built into the environment that's sustainable.
I'm not saying that we're not going to continue to see office utilization tick
up—I think we will, and that's going to be a nice tailwind for corporate
transient demand in 2025 and probably 2026.
BTN: We've seen some high-profile executives pushing return-to-office
in
the tech sector and also in
the federal government. Does that have an impact here?
Meliker: I could point to 500 headlines from major
publications over the past three years about return-to-office, and how's it
worked out? It hasn't translated. If you look at Kastle
Systems data, we haven't seen big movement. If you look at Flex Index
data, we haven't seen big movement. What people say versus what they do
aren't necessarily the same thing. I'm not of the view that turns around and we
are at an inflection point. That said, I think the federal government's a
really interesting one, because the Trump administration has been very clear
they want federal employees back five days a week, but [they're looking to] cancel
leases for 10 million square feet of office space and try to sell 450
office buildings. And [many] federal employees are under union contracts that
enable flexible work environments where they don't have to be in the office
five days.
BTN: Given all that, is it safe to say there's a cap
in the level of corporate transient demand that can be recovered to 2019
levels?
Meliker: We continue to think that corporate
transient demand will modestly tick up, but when you think about where it was
relative to pre-pandemic levels, it's probably going to stabilize about 10
percent below where it was.
BTN: What about corporate meetings demand?
Meliker: A lot of corporate group is going to be
really, really strong in 2025 and 2026. We think that's where a lot of that
demand is migrating, because if companies can't get their people together in
the office as frequently as they used to, they're going to choose to get them
together outside of the office more frequently. You can have in-house small
group where you've got your team doing a private meeting, or it can be major
conventions where you may have historically brought three or four people but
now you're bringing six or seven because you want that whole team together
because they're not together in the office anymore.
Convention center bookings this year are up 4 percent year
over year after being up 3 percent last year. They're pacing up 6 percent next
year. So we're continuing to see those bookings on the books for those big
events gaining a lot of momentum.