Fitch: Softer Transient Demand Subdues Confidence

NEW YORK—The U.S. lodging upcycle remains solidly intact notwithstanding the litany of concerns that have overtaken investor sentiment this year, according to Fitch Ratings.

Falling stock prices (since January), selected guidance cuts (late summer), weak August industry RevPAR data, and now additional guidance cuts and disappointing commentary around October transient demand during 3Q15 earnings season have all contributed to investors’ worries, with some factors transpiring alongside weakness in select key macroeconomic indicators during 3Q15.

However, several factors point to continued, solid lodging demand. Although tepid, U.S. GDP growth is solidly positive, with notable strength in the investment subcomponent the correlates closest with lodging demand. Interest rates remain historically low. Consumer sentiment was up in sequential months during October and the average level of consumer sentiment year-to-date through October is the highest of any year since 2004. October employment growth exceeded consensus expectations and currency should become less of a headwind to international visitation during next year.


From an industry perspective, Fitch expects the rate of new hotel supply to remain below demand as well as its 1.9 percent long-term historical average through 2016 and possibly longer. Group demand (rooms booked in blocks of 10, or more) remains strong, with many lodging companies reporting that the pace of group revenue bookings is positive by mid-to-high single digits for the fourth quarters of 2015 and 2016. Although still underway, Fitch expects special corporate rate negotiations should result in positive mid single-digit rate increases for this segment next year.

Several lodging companies noted an unanticipated deceleration in October transient demand (for some, based on only three weeks of data) during the third-quarter 2015 earnings season. However, most companies still expected October RevPAR to be solidly positive, up 4 percent to 6 percent.

Fitch estimates that U.S. RevPAR grew by 6 percent during October based on the weekly RevPAR statistics reported by STR Global. U.S. RevPAR growth has been positive for 68 consecutive months since the recovery began in March 2009. October’s 6 percent RevPAR growth is 10 basis points shy of the divide between the third and fourth quartiles since March 2009, with 15 months showing slower growth which is a solid result in the context of an aged lodging upcycle.

The strong U.S. dollar has hurt inbound international visitation this year. Fitch is watching the USD/EUR and JPY/USD exchange rates as an indicator of future international inbound visitation trends. The industry should face easier year-over-year comparisons beginning in 1Q16 provided that current exchange rates hold. Fitch believes lower oil prices have been a small net positive for hotels; however, air carrier consolidation (four airlines control over 80 percent of U.S. capacity) has likely helped limit fare price declines to a greater degree than Fitch had anticipated.

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