Negative economic sentiment pervades the news, the stock market, water-cooler chatter, and even the local post office. The expansion that marked the end of the financial crisis in 2009 is being threatened by a plethora of issues: political problems, state and local expenditure gaps, persistent levels of unemployment, and a fiscal budget that caused a credit downgrading of U.S. Treasuries. Despite these somewhat troubling propositions, we can think of five reasons why U.S. hotels will weather this storm quite well.
1. Corporate profits
The private sector has undoubtedly led the recovery with its tremendous growth, and hotels have been waiting with available rooms and low rates to service all participants. According to Moody’s Analytics, corporate profit growth is expected to continue throughout the 2011-2015 forecast period, albeit at a lesser pace than 2010 (see Chart 1).
This marked increase in corporate profits did not only translate into additional group and transient demand; the people who work for these companies also are seeing the benefits of a lift in corporate profits in the form of increased job security and rising wages resulting in more leisure travel. Who are these people in America who seem to have the financial capability to travel? This leads us to reason No. 2.
2. The ‘have education’ and the ‘have less education’
As private industry rebounds, we are seeing an increased divergence of unemployment by education level. For the purpose of this article, let’s define the “have education” and “have less education” populations as those with and without a college degree. Unemployment levels among those with a lower level of formal education are astoundingly high: almost 15% during 2010. Those with college educations are in the fully employed mid-4% range (see Chart 2).
The employed displayed in Chart 2 in blue are the same people who are employed by companies with growing profits depicted in Chart 1. It is not difficult then to develop a theory to understand why the overall 9%-plus unemployment rate is not having as profound a negative impact on the hotel industry (even when considering the marginally employed). Hotels saw the largest number of accommodated roomnights ever during the second quarter of 2011, at approximately 3.1 million travelers per day. There is, however, one caveat: Hotels at the bottom of the spectrum, the economy segment, are not faring as well as their counterparts in the upper chain scales. Stated differently, the higher the average daily rate, the better the hotel is performing.
Corporate performance is a big part of the domestic economy, but only a portion of total output, Gross Domestic Product. The recent downgrades to GDP forecasts are in large part a result of shortfalls in state and local government spending, which does not have a significant direct impact on hotel demand. Most state and local government employees are not required to do much traveling.
Indirectly, the state and local government spending cuts will eventually impact numerous industries, some of which will affect the demand for hotel rooms. However, the effect will be somewhat distributed in nature. GDP can be a noisy predictor of hotel demand, and at PKF Hospitality Research, our predictive hotel models instead utilize movements in income and employment as the primary drivers of hotel demand, not GDP. Chart 3 illustrates a number of industries and the corresponding levels of unemployment.
The industries where college degrees are necessary, such as financial, education and health services, have relatively lower unemployment rates. Industries dominated by manual labor, such as construction, and to a lesser degree, accommodation, food services, and manufacturing, have far higher rates of unemployment.
As good as 2010 was for hotel occupancies, it came in part from low room rates. Price and demand have an inverse relationship, so as hotel rooms get cheaper, at some point the demand for them increases. As noted, the “haves” were safely employed in 2008 and 2009 and experiencing rising income. Hotels dropped rates in 2009 and by 2010 an influx of travelers came through their doors.
Today, hoteliers are still hesitant to give up occupancy for positive rate movements beyond inflation. Because ADRs have only recently begun to show meaningful increases, it is not unlikely that attractive pricing would persist if a more pessimistic economic turn occurs. This limited ADR growth would help to insulate the hotel industry to some degree from potential shocks should an economic downturn occur.
We must not forget, however, the fundamental economic framework on which the PKF-HR hotel models are based: levels of income and employment. Based on Moody’s Analytics current forecasts, employees with a higher level of education are not as likely to lose their jobs, nor will their income shrink (see Chart 4).
According to Moody’s Analytics, levels of real personal income and total employment are expected to grow at close to the same rate during the next four quarters as they did during the previous four quarters. Therefore, those who are employed, and those who are expected to join their ranks during the next four quarters, will see more income in their bank accounts than they did a year ago, further reinforcing the positive outlook for the U.S. hotel industry.
Aaron Walls, senior economist, and Jamie Lane, research analyst, work in the Atlanta office of PKF Hospitality Research (www.pkfc.com).