Is the Industry Upcycle Ending?

Is the industry upcycle ending? Will there be a recession?

After a strong decade of growth in the hospitality sector, coupled with recent trade wars and monetary policy changes, the question at the top of every hotel investor’s mind is whether we are approaching the next great recession.

John Chang, senior vice president of Marcus & Millichap Research, presented hospitality industry data to illustrate this matter further at the Marcus & Millichap Kabani Hotel Group 4th Annual Hotel Investment Forum hosted in October 2019. “Recessions are tough on the hotel business, and our industry growth cycle is at record duration,” Chang said. Thus, it’s no surprise hotel investors are skeptical of the future of the hospitality economy.

Law of Diminishing Returns

The U.S. hospitality sector has experienced 10 years of growth since 2009, with a job market larger than the entire labor force of Canada, 1.3 billion guests in 2018, and GDP growth of $6.7 trillion. “The economy has had the longest continuous period of job creation on record, adding jobs every month for more than seven consecutive years and holding unemployment near 4 percent,” according to the 2018 Marcus & Millichap Hospitality Investment Forecast.

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However, both hotel ADR and RevPAR growth trends are starting to slow down, which could indicate a stabilization in the hotel economy. This notion aligns with a survey conducted by Marcus & Millichap Research Services, which concluded that hotel investors expect stabilized hotel property values soon.

Chang suggested following reactions in confidence levels impacted by the recent yield curve “un-inversion” to assess risk to the hospitality sector.

Expecting the Expected

What could be done to mitigate the effects of a potential downcycle or, worst-case scenario, a recession? With the uncertainty of these outcomes, it is difficult for an investor to gauge if they should avert themselves from pursuing new deals and investments and focus on preparing and preserving their assets instead. Rather than monitoring national market trends, hoteliers should shift their focus to the microeconomic side of the business, allocating more resources to identifying their competitors and target demographics. In addition, hospitality industry investors should monitor emerging travel trends to capitalize on new opportunities to increase revenue.

Emerging hospitality technology allows the hotelier to implement these strategies effectively. For instance, automated business analysis platforms can process large volumes of data to analyze and present business drivers and changes to inform a manager’s strategy. Analyzing big data allows businesses to understand existing and potential customers, leading to a more efficient distribution of funds toward marketing.

When looking toward the future, hoteliers must be ever perspicacious in preparing investments and maintaining adequate reserves in the event of a recession. However, superfluous monitoring of the state of the economy will not help much. Instead, hoteliers should shift focus to areas that fall under their control, monitoring their competitive environment and their target demographics instead. By researching and utilizing the right technologies, hospitality businesses can expand their market share to recover lost sales due to potential economic decline.