Last week at the Lodging Conference, Harry Javer and his wife Liz put on a fantastic program at JW Marriott’s Desert Ridge Resort. I have always enjoyed this conference as my favorite for many reasons – weather, laid-back vibe, approachability of attendees, food and beverage quality and more. For a brief rundown of events, here is a short overview of some takeaways:
My favorite economist, Bernie Baumohl, was spectacular as usual. Bernie started off with posing the question, “How many more blows can this cycle take? In this pivotal moment, the numbers still look good. Employment is strong, wages are growing, inflation is quiet, interest rates are low, there is plenty of capital, but worries are more prevalent that we are peaking.”
According to Mr. Baumohl, it is extremely difficult for this economy to fall into a recession because it would require a confluence of negative events. Interest rates have driven us into recessions before, but the Federal funds rate minus inflation is negative, which is good. Geopolitical eruption could spike energy costs, but he does not see that as a pertinent threat. Oil is still under $60/barrel and will not likely cause a recession unless $100/barrel is sustained for two months.
The biggest concern now is a trade war. If the manufacturing sector is starved, the construction and hospitality industries would hurt from a slowdown in furniture production or tourism from China. According to Baumohl, “The Fed really cannot help now. It is removal of uncertainty that will help. The geopolitical pot is boiling furiously, the eye of the political storm due to 2020 elections is coming closer and hence, there are 3 most likely occurrences:”
Slowing economy, an interim trade agreement that might boost the economy for elections, GDP up 2.2% for 2020, 1.6% 2021. (50% probability of this)
Hostilities erupt in Middle East/Asia, 1.8% GDP growth, 2.4% in 2020 (30% probability)
The consumer will continue to spend in their pajamas online, but with higher delinquencies, ecommerce stimulates activity quickly and the job market is still strong despite the pace of the economy. Increases in GDP of 3%. (15% probability)
Other scenarios 1% each
Bauhmohl feels that AI, blockchain and robotics will not destroy jobs and that inflation will stay down due to forces keeping prices down; e-commerce is a deflationary force. Half of the world population has internet access, making this a booming business.
New orders have dropped according to the Institute of Supply Management (ISM) below 50, with the service sector stronger than manufacturing. A decline of Chinese visitors and a trade war are hurting tourism! President Trump needed to show his constituents strength, but perhaps we should not have gone up against China one on one. The Trans-Pacific Partnership (TPP) would have helped according to Baumohl due to 12 nation participation without China. We could have brought them in later.
Xi might be President of China forever, so to speak, but he has to deal with protests in Hong Kong and more. Will President Trump shift to China hawks or moderates? China has a hybrid mix of capitalism and communism. Bottom line for the economy? No recession!
Bruce Ford of Lodging Econometrics led the discussion by letting us know that the pace of supply growth is down this year. That is good news! Vail Ross of STR let us know that we have had 112 of the past 114 months of positive RevPar growth. To let us down a bit, she mentioned that we have just had 4 quarters of negative ADR growth relative to inflation. 2019 will finish with 1.6% RevPar growth and in 2020 supply will outpace demand with ADR up 1.4% each year.
Ben Bates of Booking.com mentioned that 69% of Gen Z travelers have a bucket list and that 1 in 3 Gen Z travelers will be making a solo trip. The takeaway was, “Are you visible online for solo trips?” Mark Lomanno of Kalibri Labs mentioned channel mix, distribution mix, the decline in property direct to 28% over the past 5 years and the continuation of that decline. Brand.com is growing, channel costs are growing, but OTAs are growing twice as much as others. This is a challenge for hoteliers as costs grow faster than ADR.
HVS executive Adam Lair said that transactions are down and there is more uncertainty, but cap rates are flat. Sellers continue to demand peak pricing, but slowing RevPar growth and higher expenses decrease value. This begs the question, will investors reduce return requirements or will prices decrease? Mark Woodworth of CBRE stated that economic policy uncertainty and lower RevPar growth is not helping us and that 25 of the 60 markets CBRE tracks have increases in supply.
Bottom line on lodging industry performance? Continued slowing RevPar growth led by ADR. To a more impressive year in 2020!