Are we exploring enough housing solutions for San Diego?
Question: Are there more creative options to make space for housing in San Diego that are not being explored?
Bob Rauch, R.A. Rauch & Associates
YES: Most housing needs are on the affordable housing side. Some solutions include inclusionary zoning, removing parking minimums, changing building codes to make it easier to rehab older buildings and new funding models. But my suggestion is to take all the hotels that are currently supporting prostitution, human trafficking and drug sales and close them down and provide incentives to convert them to affordable housing units.
For the full article by Contact Reporter, Phillip Molnar, click here.
Hotel Industry – Q4 2018 and Beyond
Many of us who attended The Lodging Conference this past month heard Bernard Baumohl, Chief Economist for the Conference Board, provide his economic forecast. He covered topics in his usual fast, effective and entertaining style. Some interesting takeaways were that business spending is not up much, oil is going to see oversupply and is up markedly due to politics (not the market), and GDP will be up 3 percent this year, 2.2 percent next year and 1.4 percent in 2020, according to the Consensus Forecast.
Baumohl’s concerns include President Trump, cyber warfare, geopolitical threats and a real need for corporate agility that is currently not in place, especially as it relates to cyber warfare. He indicated that pay is not keeping up with inflation, spending is fading, oil prices are increasing, delinquency rates are up and millennials are risk averse. Consumer debt goes up when interest rates increase and they are increasing. This causes a decline in purchasing power and might indicate a wage/price spiral going forward.
Baumohl’s prognosis could most accurately be described as cloudy. Baumohl believes that tax cuts provided a huge boost in consumer confidence and that it may continue for another 6 to 12 months. He described headwinds like 10 years of growth, interest rate increases, trade wars and mid-term election fallout. Furthermore, Baumohl touched upon larger issues such as the Mueller Investigation and geopolitics of the Middle East, Russia, North Korea and Brexit.
While he is the most accurate economist I have ever met, I have to disagree with him on a couple of points. I briefly spoke with Baumohl about his prediction of Trump failed negotiations with China and other countries. Due to an unconvincing argument from Baumohl, I will push ahead with my forecast which originally called for a soft landing in 2017 that I believe was pushed back due to strong economic policies. My prediction is a soft landing in mid-late 2019 and no recession.
As I indicated in my forecast last month on my website, “business and consumer confidence and spending are strong and future growth for 2019, especially in the first half, looks positive. Interest rates and inflation have increased modestly, in sync with movements in the economy. At this point in the cycle, there are headwinds including trade disputes, politics, higher interest rates and inflation, Iran, North Korea, debt levels, immigration and Congressional elections in November. But there are tailwinds that are strong as well. These include the economy, low unemployment, higher wages, relatively low interest rates and overall inflation, potentially successful trade negotiations, global growth and strong consumer confidence.”
U.S. Lodging Industry
My biggest takeaway for STR’s presentation by Ali Hoyt at The Lodging Conference was that average rate growth is near zero when inflation is considered. Occupancy levels are at a historic high and average daily rate (ADR) represents most of RevPAR growth. Hoyt reported that we have seen 102 straight months of RevPar growth. Her forecast is for RevPar growth of 2.6% next year, down from a forecasted 3.2% this year. Occupancy is essentially flat due to supply and demand being in balance, so most of RevPar is from ADR.
A report at The Lodging Industry Investment Council (LIIC) by Michael Bellasario of Baird’s showed hotel brands underperforming relative to Hotel REITs. They are forecasting 2018 RevPar to finish up 3.1% this year and up 2.5-3% next year. Despite the surge by REITs, Baird’s favors hotel brands over hotel REITs due to gains in market share and a better business model in a slow growth environment. Most of the other pundits including CBRE call for similar occupancy, rate and RevPar performance over the next year.
The big challenge might be to reverse some of the trends that hoteliers have been battling relative to high costs of health care, wages driven by shrinking labor pools and brand required PIPs. Further, CBRE has issued a report on reduced labor productivity which coupled with wage increases is not good. The combination of these rising costs and increased cost of distribution can severely impact bottom line performance. Despite the record occupancy levels, ADR growth continues to challenge hoteliers. Factors such as increased supply, low inflation, the sharing economy and rate transparency make it more difficult to raise rates.
There is great economic news that should lead to average rate growth. Companies are reporting excellent sales and profits and the rate of overall economic growth has improved. Q2 Gross Domestic Product (GDP) was at 4.2% growth, the best pace since 2014. Business and consumer spending and confidence are strong and very encouraging for future growth going into 2019. While interest rates and inflation have moved up modestly, they are still far from their historical averages. The headwinds discussed above are real and must be factored into any investment decision. Q4 2018 and all of 2019 are still looking strong.
What is a soft brand and is it of real value?
This article was originally published at Hotel News Now.
Here’s a look at the differences, impact and growth of soft brands in the hotel industry.
A soft-branded hotel has a franchise affiliation that primarily relies on its own identity rather than that of the franchise or “brand,” but benefits from the connection to the global distribution system (GDS) and central reservation system (CRS) among other resources for support. When I worked for Best Western International in the 1980s, we provided that type of support for over 2,000 hotels in North America.
While many of them used our signage, they primarily identified as an independent with a unique name.
In the 1990s, one of the hotels we managed was called the San Carlos Hotel in Phoenix. It was affiliated with Historic Hotels of America. One could call that affiliation a form of soft branding as well and naturally, there are other examples like Preferred Hotels, Small Luxury Hotels of the World and Leading Hotels of the World that come to mind. But the real soft brand kick-off was 10 years ago, when Choice Hotels International founded the Ascend Collection.
Today, soft-branded hotels are part of the global reservation, distribution and rewards systems that travelers want and need. The rise of Airbnb, coupled with a shortage of sites where the big brands could put their flags gave rise to the current soft-brand boom. Marriott International has the Autograph Collection, Luxury Collection and Tribute Portfolio. Hilton has Canopy by Hilton, Curio Collection by Hilton and Tapestry Collection by Hilton. Hyatt has Unbound Collection, Best Western has BW Signature Collection, BW Premier Collection and SureStay Hotels and Wyndham has Trademark, just to name a few.
Those less noted soft brands include Magnuson, IBC (we are launching with them this month in Tucson, Arizona) and LE/Luxe. The Red Collection from Red Roof Inn and InterContinental Alliance Resorts from InterContinental Hotels Group round out the group to the best of my knowledge.
Soft brands also have advantages to the owner—less onerous property improvement plans (PIPs) and “brand” requirements, more creative independence from a design perspective and one would think lower fees. Think again. The fees charged by the soft brands can be very similar to the total “hard” brand fees. On the lower side is Best Western at 5% (going public would likely cause that number to rocket upward) and others can be over 10%.
What other benefits do soft brands offer? Lower online-travel-agency fees, negotiated well below what one would pay as an independent and far less reliance on those OTAs. Shifting share from a commission rate of 20% to under 15% is important. Better yet, when Airbnb goes OTA or Google, Facebook, Amazon or another behemoth embraces blockchain technology with an OTA model, Expedia and Booking.com will really need to hustle to keep growing.
Another benefit, often not thought about, is that soft brands do not limit your average rate. Brands put ceilings on rates as they prefer franchisees to “stay in their swim lanes” so to speak. As there are no perceived or real swim lanes with soft brands, rate ceilings only exist to the extent that the market is there.
Soft brands have seen impressive growth and financial performance over the past decade. Some reasons include the desire of guests to have an authentic experience, one that perhaps is not perceived to be available at a typical branded hotel. In addition, unique food-and-beverage concepts are appreciated by today’s travelers, a change of pace from traditional branded hotel F&B offerings, with the local culture chosen by the owner, not a brand.
Technology is another area that has upside versus the brands. Branded hotels only add technology at the speed of the organization. We take our marching orders from the brand to find out when our hotel will receive the technology upgrade (mobile key is an example). Soft brands move at the speed of the owner or developer, not the brand. Communal areas are another feature of more independent hotels—no brand executives saying, “you can’t do that!” And guests still get their brand points, so everybody is happy—the owner, the guest and the brand that collects the high fees!
The most interesting question for me is what will happen when the music stops? Can the brands support their core products plus a handful of soft brands? Only time will tell. See you at The Lodging Conference!
What are the bright spots in San Diego’s economy?
Question: What do you find most encouraging today about the San Diego economy?
Bob Rauch, R.A. Rauch & Associates
San Diego’s economy benefits from working on all cylinders. We are still leaders in defense and the military. We have a vibrant tourism industry with revenues generated from groups, leisure visitors and corporate travelers. The communications technology and life sciences sectors are robust. And we are just beginning to benefit from limited direct air from Asia, our partnership with Tijuana and areas like artificial intelligence and related fields. Sprinkle in our climate and voila! Success ahead!
For the full article by Contact Reporter, Phillip Molnar, click here.
To Q3 and Beyond: Hotel Industry Forecast for San Diego, Arizona, Colorado, and other U.S. Markets
U.S. Economy
Companies are reporting solid revenues as well as profits. Q2 Gross Domestic Product (GDP) was at 4.2 percent, the best quarter in five years. Business and consumer confidence and spending are strong and future growth for 2019 looks good. Interest rates and inflation have increased modestly, in sync with movements in the economy. Having said that, my favorite index is the Institute for Supply Management’s Purchasing Management Index.
That index fell to 58.1 in July, 2018 from 60.2 in June, below market expectations of 59.5. The reading pointed to the weakest expansion in the manufacturing sector in three months amid a slowdown in new orders, export orders and production. Demand remains robust but manufacturers keep showing concerns about how tariff-related activity, including reciprocal tariffs, will continue to affect their business.
At this point in the cycle, there are headwinds including trade disputes, politics, higher interest rates and inflation, Iran, North Korea, debt levels, immigration and Congressional elections in November. Naturally, a Black Swan event would potentially be an economy killer. But there are tailwinds that are strong as well. These include the economy, low unemployment, higher wages, relatively low interest rates and overall inflation, potentially successful trade negotiations, global growth and strong consumer confidence.
The bottom line is that there is a green light going forward for the foreseeable future, despite this long cycle. Driven by a solid overall economic base that includes solid GDP growth, wage increases and low unemployment, almost all data is positive, however, rising interest rates are causing increased debt payments for borrowers and the maturing business cycle will eventually lead to slowing growth.
U.S. Lodging Industry
U.S. hotels grew revenue per available room (RevPar) at a 3.3 percent clip for the trailing 12-month period of August 2017-July 2018. This is up from most expectations as Q2 2018 really saw some momentum shifting. Occupancy levels are at a historic high and average daily rate (ADR) represents most of RevPAR growth. We see no reason that the economy cannot stay strong and thrive through 2018 and 2019. ADR growth is expected to increase 2.5 percent next year, albeit not enough to keep pace with the cost of labor.
New supply is not likely to stop the continuation of positive RevPAR growth. Banks will put the brakes on lending, however, those who are experienced and have the full development package of equity, leading brand or unique ideas and a strong market will be able to develop. Increased supply and construction costs are two reasons development is difficult today. A Black Swan event or a global meltdown are not likely to occur but would certainly stop this positive growth. Only time will tell but 2018 and 2019 look solid.
The major forecasting firms, CBRE, PwC and STR are projecting that the U.S. lodging industry will achieve an annual occupancy rate of around 66 percent in both 2018 and 2019, flat as supply and demand are running at about 2 percent annual growth. Average rate growth should finish at between 2.5-3 percent, according to the pundits, in line with projected GDP growth.
The big challenge might be to reverse some of the trends that hoteliers have been battling relative to high costs of health care, wages driven by shrinking labor pools and brand required PIPs. Further, CBRE has issued a report on reduced labor productivity and HotStats has indicated GOP has peaked. The combination of the rising costs and increased cost of distribution can severely impact bottom line performance.
Q3 RevPar outlooks call for some deceleration from Q2 based on the combination of July 4 falling midweek, impacting leisure travel and the Jewish holidays falling mid-week in September, impacting corporate travel. According to Cleveland Research, 2018 industry forecasts are slightly higher on demand while supply remains in check; 2019 looks like a step down, according to the firm.
Following better than expected year-to-date trends, STR raised their full year outlook to 3.2 percent RevPar growth, up from their prior forecast of 2.9 percent. The cycle now is at over 100 consecutive months of RevPAR growth vs. 56 months in the prior cycle and 111 months in the cycle of the 1990s. Hotel demand has continued to rise, albeit modestly, and the industry as a whole has been able to maintain a level of pricing power.
Meanwhile, as the prognosticators look further out into 2019 the expectations are for much of the same with perhaps a slight trail off. For example, STR is calling for a 2.6 percent RevPAR increase and a 0.2 percent increase in occupancy to 66.4 percent, while ADR is expected to grow by 2.4 percent to $132.97.
Specific Markets We Follow
Phoenix
Look for continued job growth as Arizona continues to have a stable and predictable business climate, workforce depth, quality of life and strong education programs. The gubernatorial election could be divisive but Governor Ducey has a strong command of the business climate and normally, the economy rules in these elections. The entire Arizona economy is very strong and we remain bullish on this entire market and remain invested.
With minimal new supply growth, (Tempe is an exception but new corporate growth in that submarket has kept pace with new supply) the Metro Phoenix market will have a very strong Q3 and Q4 2018 and 2019. Year to date RevPar is up 4.2 percent through July, 2018. Average rate growth should continue at 3 percent with flat occupancy levels. We expect occupancy, average rate and revenue per available room to finish 2018 near 70 percent, over $130 and $91 respectively with modest growth in 2019.
Tucson
The Tucson market has led the state of Arizona in every growth area; ADR, occupancy and RevPar. Double-digit RevPar growth is highly unusual today but Tucson is almost there. Trailing 12-month occupancy and rate are 65 percent and $110, up 9.5 percent in RevPar. About half of the increase is in rate, half in occupancy.
The market is strongest around the University of Arizona, in extended-stay hotels, in transient corporate and leisure and in the group market. This positive balance leads to 5-6 percent RevPar forecasted by STR for 2019. While north and south Tucson offer different ADR levels, (north is much higher) the entire market is growing. We are invested in this market as well.
Colorado Springs
This market was soft after many companies left back in the early 2000s but has seen a resurgence based on proximity to booming Denver, legalization of marijuana in the state (still illegal in Colorado Springs) and phenomenal natural attractions like Pikes Peak and Garden of the Gods, the Air Force Academy, Olympic Training Center and much more.
Occupancy levels are beginning to approach 70 percent and rates should exceed $125 this year. This is after years of languishing in the 50-60 percent range throughout much of the last decade. Year to date, RevPar is up 6.3 percent through July, 2018. We expect steady occupancy in the 68 percent range and growth in average rates as new supply is just a few hotels in a market with over 11,000 hotel rooms. We remain bullish on this exciting leisure-oriented market and while we sold an investment here, we are looking at additional opportunities.
San Diego
San Diego should see continued strength from all market segments. Convention Center groups are down but leisure is up and corporate is stable. Supply is increasing in downtown but demand should absorb most of it. 2017 finished at over 77 percent occupancy and $160 average rate for a RevPar of almost $125. Year to date revPar is up 3.5 percent through July, 2018. We expect to see ADR at $165, up 3 percent from 2017 this year and similar growth in 2019 with ADR approaching $170 with steady occupancy levels of 77-78 percent.
This is our home market and we will provide a complete review of this market as always shortly.
Summary and Quick Facts
Despite the record occupancy levels, average daily rate (ADR) growth continues to challenge hoteliers. Factors such as increased supply, low inflation, the sharing economy and rate transparency make it more difficult to raise rates. Other challenges include the lack of buying opportunities available as sellers are not motivated to sell. According to JLL, the top 5 cities that investors are interested in investing in over the next two years are Washington, D.C., Boston, Tampa, Los Angeles and Portland.
Economic factors that may dampen the industry confidence and the perceived positive impacts of the Tax Cuts and Jobs Act are trade tensions with China and rising cost of labor for entry-level jobs. According to STR data as of June 2018, year-to-date total U.S. supply growth capped at 1.9 percent. There are several markets where supply growth is high – New York, Orlando, Dallas, Nashville and Denver have seen significant growth in new supply.
Global business travel spending reached over $1.3 trillion in 2017, up more than 5 percent over 2016 levels, according to the Annual Global Report & Forecast, released by the Global Business Travel Association (GBTA) last month at their San Diego Convention. Spending is forecast to advance another 7.1 percent in 2018 and will expand to $1.7 trillion by 2022.
This economy remains intact. Stay focused and as we transition to another economy, it is more likely that this transition will be one of a soft landing and not a meltdown. To a great finish to 2018 and a Happy and Healthy New Year to those who celebrate the Jewish New Year next week! See you all at the Lodging Conference!
Build a brilliant business plan
This article was orginally published at Hotel News Now.
Hoteliers should take these steps when they start developing business plans.
Before we complete our business plans for 2019, a review of macroeconomic data is in order.
Economists are starting to talk about a recession in the next two years. We should begin planning for that downturn but for the next 12 to 18 months, I would not lose any sleep over this. We should see a 2.5% GDP growth rate over the next four quarters.
Unemployment is low, consumer confidence continues to be strong, and notwithstanding the possibility of a trade war, the short term economic conditions are good.
All of this information continues to bode well for the hotel market in the U.S. next year. STR is forecasting 2.5% RevPAR growth in 2019 and most pundits agree on that range. Naturally, the caveat is that unexpected “event” that could stimulate a precipitous decline in demand. We believe that can be averted over the next 12 to 18 months. (STR is the parent company of Hotel News Now.)
The time for budget and market planning is coming up quickly. While many operators merely look at last year’s numbers to budget and forecast, the only meaningful way to budget is to analyze the market thoroughly. Whether you are opening a new business or getting ready for 2019 budgeting, now is the time to begin the planning process.
1. Stay informed on your performance
Review your trend report and competitive-set information from STR. This will provide a baseline. Ghost-call competitors to obtain price points, features and benefits.
2. Learn from the competition
Meet with general managers and marketing team members of competitors. Tour each business and establish a referral program. Coordinate a market review with your franchise marketing manager if appropriate and discuss opportunities for digital advertising to promote your business with your extended marketing team.
3. Develop a 2019 sales and marketing budget
Do not assume growth from this year. Review the STR report and other market intelligence and market pace reports carefully. Review quality and quantity of sales collateral and ensure your email lists are updated for newsletters and blasts and that you are compliant with GDPR.
4. Review customer information guides, whether electronic or printed
Plan a sales blitz. Order blitz giveaways and mementos with your logo, address, website and phone numbers. Choose items that will stay in contacts’ office such as candy jars, post-it notes or coffee mugs. Review your central reservation database property information file for errors or omissions.
5. Stay invested in your community
Meet with key contacts at your convention and visitors bureau and chambers of commerce. Obtain a list of advertising and trade show opportunities for budgeting. Contact local chambers of commerce and obtain lists of your area’s top businesses and employers. Qualify key companies and individuals to create or update your own emailing or mailing lists/labels. Business journals also have great lists.
6. Pursue many forms of marketing
Contact guest loyalty rewards program administrators at franchise headquarters to arrange to promote your business in the next member newsletter. Solicit articles on your business as a feature story. Develop possible press releases for the coming year along with a public relations plan and contact each segment specialist for the franchise worldwide sales staff to see what opportunities are available to promote your business at upcoming trade shows, future segment specific directories or sales missions. Naturally, if you are independent, you must ensure you have representation to compete in each market segment.
7. Rely on strong email promotions and website offerings
Create a database for electronic mail promotions and ensure your website is not a brochure but rather a focused, customer-acquisition medium. Create website awareness, or in other words, create some “buzz” via pay-per-click and unique offerings. And if your website is not mobile-optimized by now, this needs to be corrected immediately.
8. Continuously create and deliver ‘can’t-resist’ content
Traditional advertising is rapidly losing out as marketing professionals realize the advantages and effectiveness of digital content marketing. Marketing’s new mantra of “brands must now act as publishers” has arrived in part because of social media and its potential to engage in meaningful conversations with their loyal fan base and potential clients alike.
9. Invest in the sharpest media tools
These include blogs, social media, newsletters, webinars, e-books, photo-sharing and videos. You will drastically reduce the hefty investments in traditional paid media that are becoming substantially less effective with modern consumers. Simply put, you need to create and share content while being of interest to lots of people to be a player!
10. Calculate the lifetime value of a new customer
As an example, if a traveler stays with you two nights per month at $150 per night for five years, that is $18,000 in today’s dollars. This data is helpful in determining the value of a new customer. Include a call to action in all advertisements and measure the result of every email marketing blitz and test new approaches periodically.
Use this process now or risk losing your competitive edge! Here’s to a strong finish in 2018 and a great start to 2019 with a business plan and budget based on good information!
Will President Trump’s criticism of the Fed have any impact on monetary policy and interest rates?
Question: Will President Trump‘s criticism of the Fed have any impact on monetary policy and interest rates?
Bob Rauch, R.A. Rauch & Associates
NO: President Trump’s intended audience is not really the Fed, rather it is his base, the Republican Party and Independents. The Fed itself is an independent institution and while there are fears of inflation and concerns about the labor market among some conservatives, Mr. Trump will not impact Fed policy. Most likely, President Trump and the Fed will both convince conservatives to be less afraid of inflation and all will be in a better place.
For the full article by Contact Reporter, Phillip Molnar, click here.
The Difference Maker: 2019
Every year is different in many ways. Technology is changing very rapidly and yet there are some basics that we often forget that can make the difference right now and this coming year. I was compelled to write this after reading The Power of Moments by the Heath Brothers. These tips are specific hospitality industry tidbits based on this fine book and 40+ years of experience in the industry. Yes, I started when I was 4.
Elevating Experiences
“Moments of elevation” are experiences that rise above the routine, according to the aforementioned book. These moments make us feel joyful and motivated. To create these moments, we need to do something unusual. Back in 1986, I vividly recall how we created a Halley’s Comet package that included room, food, bus trip to the desert, rented telescopes and an Arizona State University Professor of Astronomy. Yes, it required a 3A wake-up call to our guests but nobody complained and it made for rooms business and great press.
When we get our team members excited about something, they will ensure the guests are excited. It works and can be as simple as offering a taste of beer, wine or unusual tea as a mini-tasting before dinner or on check-in. Our own team members can come up with great ideas that do not cost much money but are highly unique.
Insights and Creativity
“Moments of insight” deliver realizations and transformations. To produce moments of insight for others, I like to use a creativity “stretchercise” derived from another book, Fanning the Creative Spirits,” by Charlie Girsch. These “stretchercises” might be one of the following:
- Do an activity with your non-dominant hand such as writing, eating or brushing
- Sit in a new place for meals, meetings, church, temple
- Read the paper in a different order
- Take a new or different route in your car
- Intentionally sleep in a new place or position. Note what happens upon waking
These activities allow us to gain a fresh perspective and I have had tremendous success when applying this to my Entrepreneurship course at Arizona State University every semester. The students become very creative after the simple exercises and it works in the hospitality workplace as well.
Pride of Work
“Moments of pride” commemorate people’s achievements. Recognizing others for their achievements takes a bit of time and creativity but as an example, one of our general managers was honored for his efforts in helping young people at a non-profit. An investment of time and effort yielded a huge reward for our GM so we acknowledged his work. We routinely award our team members for employee of the month, quarter or year but do we send the announcement to the local newspaper with the photo? Remember, everyone likes to be recognized! We’ve all read about how salary is not the driver of happiness in the workplace. Pride of work is up near the top!
Connection
“Moments of connection” bond us together. Groups unite when they struggle together toward a meaningful goal; they often begin their work with a “synchronized moment.” I’ve been involved in fundraisers for kids who literally are starving. We made sandwiches (P&J) for thousands of these kids by creating a contest among attendees at a conference. The competition was fun, making the sandwiches at warp speed as a team created camaraderie and it worked for all. This type of connection is meaningful and may create a long-term bond.
Marty Sklar, Former Disney Executive
Before he passed away, Marty Sklar went out and talked to our group about the Disney approach since he was there right at the beginning. He preached his 10 commandments:
- Know your audience
- Wear your guests’ shoes
- Organize the flow of people and ideas
- Create a visual magnet
- Communicate with visual literacy
- Avoid overload – create turn-ons
- Tell one story at a time
- Avoid contradictions – maintain identity
- Ounce of treatment – ton of treat
- Keep it up (maintain it)
Sklar added some more comments like “leadership is earned and must be exercised daily” as well as “be optimistic because if you are not positive, who will be?”
At the end of the day, we often look at profit and loss statements and reports and forget who is taking care of our guests and what we can do to make the businesses we own more exciting for everyone, including ourselves. Try something here and it will work wonders! To a great finish to 2018!
Dear owners, investors: 2018 will finish off strong
This article was originally published at Hotel News Now.
Signs are pointing to a healthy end to 2018. Here’s what the industry is expecting based on economic performance reports from STR, Tourism Economics and Oxford Economics.
We are now well into the ninth year of the current economic recovery, making it among the longest period of recovery in U.S. history. How long it will last is anybody’s guess. However, based on what’s happening in the hospitality industry, it looks like a strong third and fourth quarter are upon us in 2018.
Property investors, developers and lenders have remained relatively disciplined and lenders are requiring real equity behind their mortgages. The window could be limited as interest rates are on the way up, but increasing interest rates are usually a sign of economic growth.
With consumer confidence at an 18-year high, employment and most economic indicators remain strong. A few years ago, many of us, including myself, felt the economy would be flat to up very modestly at this point in the economic cycle. It has been well over 100 months since we hit the trough in 2009. Tax reform reduced regulations and the strength of our nation could keep this robust economy going and dramatically enhance it. Supply growth has begun to moderate somewhat, in part due to high construction costs and lender restraint.
Oxford Economics expects 3.1% global GDP growth in 2018, the strongest performance in seven years. This is being driven by low interest rates, supportive credit and the fastest world trade since the financial crisis. Despite the mounting threat of more protectionist trade measures, we expect the impact on global growth and trade to be mild. This should provide a supportive economic base for travel to the U.S. in both 2018 and 2019. Economies of major U.S. source markets are all expanding.
Economic growth is expected to slow somewhat in 2019 across most markets, according to a majority of economic pundits. Their comments include U.S. exposure to the reduced benefit of tax reform, the rising deficit and mounting trade wars that hold the potential to stifle export growth. Additional comments are that India will continue to lead growth among all major economies as China continues its measured slowdown.
Economic activity in the manufacturing sector expanded in May and the overall economy grew for the 109th consecutive month, according to the nation’s supply executives in the latest Manufacturing ISM Report. Hotel real estate investment stocks were up markedly in Q2 of 2018 and hotel brand forecasts are up. While the biggest merger today is the LaSalle-Pebblebrook deal, we see more mergers and acquisitions coming that might include a large brand merger.
The return of business travel has been impacted by recent tax cuts and 2018 is rock solid. STR, parent company of Hotel News Now, increased their 2018 revenue-per-available-room growth forecast to 2.9% (from 2.7%), driven primarily by average-daily-rate gains and strong transient demand. STR’s 2019 RevPAR growth forecast remains at 2.4%
International markets, originally thought to be declining due to U.S. President Donald Trump, are actually picking up steam. A new Tourism Economics report is showing that the data from the past few years has been inaccurate and that international travel has actually been increasing rather than decreasing. According to Tourism Economics, overseas travel to the U.S. increased 3.9% in 2017. Furthermore, the dollar is sitting very close to equilibrium and is no longer a deterrent to travel. While Chinese investment is way down, Chinese travelers and others continue to visit the U.S.
What does all of this mean to hotel owners and investors? Values have peaked, RevPAR growth has peaked, but all is stable for a while longer. Sell if you are looking to avoid working through a correction in the market, and buy below the peak if you are in for the long haul because interest rates are relatively low and money is available. Hold if you are able to benefit from low-leverage, low-interest rate loans. There is no reason to believe we are going to crash and burn like in late 2008. 2018 will still be great!
Is a flattening yield curve a sign of a coming recession?
Question: Is a flattening yield curve a sign of a coming recession?
Bob Rauch, R.A. Rauch & Associates
NO: The yield curve has predicted whether future GDP growth will be above or below average, but it does not predict an actual number. Probability is itself subject to error and differences could arise from changes in international capital flows or inflation expectations. Ergo, yield curves should be interpreted with caution. Eventually, we will be in a recession but don’t lose any sleep over it as the yield curve is just one of many indicators.
For the full article by Contact Reporter, Phillip Molnar, click here.