Headwinds for Hotels

As the summer travel season kicks off, Baird sat down with Senior Research Analyst Michael Bellisario who covers Hotel REITs & C-Corps to discuss how the broader economic recovery is impacting the hotel sector, as well as how hotel companies are responding to headwinds such as the current administration’s restrictions on travel and a stronger U.S. dollar. He also reflects on the continued popularity of home-sharing companies like Airbnb and how that’s shaking up the industry.

What impact is a recovery in the broader economy having on the overall health of the hotel sector?

The simple answer is hotel demand remains quite strong despite all of the ongoing macroeconomic and political noise. Demand trends are strongest in the leisure and group segments, while the business traveler has become more price sensitive lately, especially as companies closely monitor their travel and entertainment budgets in today’s slower-growth revenue environment.

From a hotel profitability standpoint, bottom-line results are not as strong as the demand trends might suggest. New hotels continue to open in many markets, which offsets a lot of the demand growth the industry is currently experiencing. Also, hotel rate growth has stagnated recently, which is good for the consumer, but remains a challenge for hotel owners and operators, especially as costs – particularly labor – continue to rise.

As the economy grows, non-gateway markets like Charleston and Nashville have been the better performers in terms of hotel demand and RevPAR growth trends; these markets tend to outperform as the economic recovery broadens. Additionally, as leisure travelers evaluate potential vacation spots, and as companies consider relocating offices and/or employees to new cities, lower cost of living markets (e.g., Atlanta, Orlando and Phoenix) are more attractive to both consumers and corporations.

The sector is facing a number of headwinds including restrictions around travel into the country and a stronger U.S. dollar. How significant are these threats and what are hotel companies doing to counteract them?

There is no doubt that these headwinds are negatively impacting domestic hotel demand and pricing. The travel restrictions, while only impacting a very small percentage of inbound international travelers, are causing some groups to reconsider hosting events in the U.S. out of fear that a few attendees might not be able to participate in a conference or trade show. This could potentially cause the perception of the U.S. as a travel destination to worsen. In response, we’re seeing some industry leaders such as Marriott International, Inc. (MAR) CEO Arne Sorenson go on the record as vocal proponents of open borders and the U.S. avoiding political isolationism.

The stronger U.S. dollar has been a headwind for the last few years, and there is a two-fold impact to hoteliers. First, the stronger dollar deters some foreign travelers from coming to the U.S. as their trip has become more expensive. Second, the stronger dollar has pushed some domestic travelers to consider international vacations given that their dollars go further than they ever have in some markets such as London.

These headwinds generally impact urban gateway markets like New York City much more than the smaller secondary and tertiary markets, which is part of the reason recent performance in the latter locations has been relatively stronger. Hotel owners and operators, as well as cities and states, have become more targeted in their overseas marketing efforts. Hoteliers are working to shift their mix of business to offset this weakness, but it remains a work in progress.

What impact is the rapid rise in popularity of home-sharing companies like Airbnb having on hotels and how big of a threat does it pose? What are hotel companies doing to remain competitive and drive loyalty?

Airbnb is a well-known threat at this point in the hotel cycle, and its impact is largest during high demand periods, which limits the rates that hotels can charge on these sold-out nights. Positively, though, many cities like New York City, San Francisco and Santa Monica have enacted legislation with more stringent regulations, taxes and fines for Airbnb hosts. With the support of government officials, local agencies and advocacy groups, Airbnb’s proliferation has slowed recently.

Overall, however, home-sharing companies are here to stay, especially with leisure travelers. Hotel brand companies like Hilton Inc. (HLT), Hyatt Hotels Corporation (H) and Marriott have acknowledged the power of the sharing economy, and are tailoring their brands and loyalty programs to customers’ changing preferences. New brand introductions, increased opportunities for guests to earn and redeem points, and additional travel partnerships are some of the ways large hotel companies have attempted to make their brand platforms more valuable and increase customer loyalty.