2015 ended as expected: a record year for the hospitality industry. 2016 is looking to continue that trend with expected ADR growth at 6 percent and though occupancy looks to remain relatively flat, this translates to a 6 percent growth in RevPAR and perhaps the most profitable year ever in our industry. Now that you’re done celebrating, I’d like to warn you that our current economic cycle will be reaching an end sometime next year. I’m not foreseeing a recession as we’ve experienced in past economic downturns, but more of a soft landing in 2017 as the economy pulls back slightly.
There are a multitude of factors that will impact our industry and lead to this soft landing. 2016 is an election year here in the US. The impacts of new economic policies will start to be noticeable come 2017. After periods of growth and prosperity, the ever present threat of new supply will rear its head, though it will be less impactful than it could have been as banks continue to maintain rigid standards for lending. With forecasted occupancies remaining flat in 2016, as new supply enters the market we will see a supply/demand imbalance beginning in 2017 in many markets. There are still some markets that are growing and will have continued prosperity for several years. Phoenix is one of them as witnessed by their double digit ADR growth in 2015.
As these factors start to weigh on the industry we will notice an even bigger impact from OTAs and the sharing economy. The American Hotel & Lodging Association warned earlier in 2015 that the now completed merger of Expedia and Orbitz would create a duopoly with Priceline and Expedia controlling 95 percent of the market. The sharing economy (mainly Airbnb), though discussed thoroughly in 2015, has yet to really impact the hospitality industry. As the economic pullback sets in and the OTAs reclaim lost market share, we will start to see a noticeable impact from the likes of Airbnb as guests get more comfortable with the platform and use it to seek out quality and affordable options.
Fallout from minimum wage increases and changes to overtime laws for salaried workers will begin to be noticeable in 2017. Net Operating Income (NOI) will be impacted as the minimum wage increases take effect over the next few years. Health care cost increases are another contributing factor to our soft landing in 2017. Further, the industry has been growing RevPAR on the plus side for 67 months so it should not be a surprise if that trend is in jeopardy.
A soft landing in 2017 is not meant to scare you. Though we are coming to the end of our current economic cycle, it does not mean we are entering a recession. I am currently still forecasting 1-2 percent growth for 2017, but as hoteliers we need to prepare ahead of time for this pullback after several years of fantastic growth. Invest in upgrading your product while profits are strong and interest rates are low, so you can keep up with the new supply as we enter this soft landing. With the current terrorist threats around the world, any unforeseen event could tilt this soft landing toward a more difficult economic environment. Stay ahead of the curve the best you can and arm yourself with the tools you need to succeed in a softer economy. That is a good plan regardless of what happens—good luck in 2016! It will be a great year so enjoy it!