REPORT FROM THE U.S.—The coronavirus pandemic has changed every prediction about U.S. hotel performance in 2020, including how industry analysts make their forecasts.
As companies such as STR, Tourism Economics, CBRE and PwC have had to revise their 2020 forecasts, in some cases multiple times, those creating the forecasts have had to change how they weigh various factors and consider new variables introduced by COVID-19. STR is the parent company of Hotel News Now.
STR and Tourism Economics
The three numbers STR tries to forecast are supply, demand and average-daily-rate growth, said Jan Freitag, SVP of lodging insights. From supply and demand, STR can figure out occupancy changes, and that coupled with ADR changes reveals revenue-per-available-room changes.
“You look at each of the components, and you say what is still true and what is no longer true,” he said.
On the supply side, there’s a high likelihood that most but not all of the projects in the ground today will open, although some might be delayed, Freitag said. However, the total number of rooms in construction will decrease as projects open and fewer projects break ground. A severe decline in the construction pipeline would be driven by a variety of reasons but mostly by uncertainty about the future and for a lack of debt capital as people don’t know how to underwrite a deal.
Room demand has historically been connected to GDP growth, he said. When the American economy contracts, there’s a recession and room demand declines as well. However, with the pandemic, “the magnitude of the demand decline is completely unhinged from any relationship to GDP,” he said. Travel has dried out completely in an unprecedented way.
While the relationship between demand and GDP isn’t as close as it once was, Freitag doesn’t believe it’s nonexistent. The unemployment numbers are another complication, and those who are unemployed or underemployed are putting off travel to pay for other things like food and their mortgages, he said.
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Room rates are the trickiest part of the equation, Freitag said. Everyone can count cranes and permits pulled in city halls, and they can even make assumptions about how people are traveling, but what people are paying for their rooms is the “real wildcard” in this recovery scenario.
When the economy opens back up and people begin traveling again, but perhaps at smaller numbers, hoteliers will try to entice them to their hotels, and the easiest way to do that is through offering deals and discounts, he said.
“That will have a significant impact on room-rate declines or a lack of room-rate growth,” Freitag said. “What that looks like is very hard to predict. We will try it, and we will do it. We will come up with a number, and it will likely be wrong. We just don’t know which way.”
Under normal circumstances, Tourism Economics has a quarterly process in which it takes the most recent quarter’s historical hotel data and most recent Oxford Economics macro forecast and put them together to run its models, said Aran Ryan, director of lodging analytics at Tourism Economics, an Oxford Economics company.
“That’s what we’re trying to pay attention to is what’s going on in the hotel sector and the different chain scales and then putting them together with what’s going on in the broader macroeconomy and what the outlook looks like,” he said.
Normally there might be shifts in tenths of a percentage point in revenue per available room, but now Tourism Economics is having discussions about changes of 10%. That scenario has come up before when talking about a single property or a local market in a disaster but not the whole country, he said.
Tourism Economics was thinking about what the fourth quarter of this year will look like and then working back from that and working ahead from that, Ryan said. The idea is to pick something that’s six months out from now and trying to think rationally about it because the near-term environment is so unpredictable.
In projecting the fourth quarter of 2020, Ryan has been looking at three scenarios. One scenario could be an upside case in which the virus is largely contained.
The next two scenarios involve increasing amounts of challenges, he said. The moderate scenario might be one in which groups are still allowed to meet with a certain level of social distancing and other regulations in place. In the most extreme case, there might be many places in the country where groups are unable to meet as there are more restrictions on places like bars and restaurants, he said.
CBRE
The exposure of the hospitality industry to the pandemic and the resulting crisis is greater than other aspects of the economy, said Jamie Lane, senior research director of Econometric Advisors and CBRE Hotels Research. Before the pandemic, when CBRE was creating its forecasts, it looked at what was going on with things such as income, employment, GDP, oil prices, migration and international travel. While those are all still important, those are now pegged off what the recovery from the pandemic looks like, he said.
CBRE has been following some epidemiological forecasts and groups, and Lane said CBRE ventures to bring those together into a single consensus. The company is using that to find a range of different recovery time frames, looking at when the pandemic peaks. From that point, it’s a matter of how long it takes for the travel restrictions to ease to better inform the forecasts of employment, income and GDP, he said. All of that combined shows insight into the economic base left to begin to support business, leisure and group travel.
“We feed both of those into our models to then try to get what we think occupancy and ADRs are going to be for the months and years ahead,” he said.
CBRE has been using data from STR on recovery times in China and overall demand and occupancy in countries such as China and Italy as recoveries start to take place after they reach a peak number of COVID-19 cases and the number starts to decrease, he said.
PwC
Forecasting is an imperfect science, said Scott Berman, U.S. hospitality and leisure practice leader at PwC. Everyone making forecasts is doing the best they can with the data available. There are now more than a dozen additional variables to consider in developing their analysis, he said. It’s an econometric model with a human element involving dozens of subject matter experts, including industry experts, economists and risk analysts.
PwC has never had to consider the elevated levels of unemployment right now, which could potentially exceed 20%, he said.
The hotel industry has three basic food groups: leisure, corporate and group. Berman noted everyone has been focused on leisure, particularly how well hotels performed over Memorial Day weekend. While there were terrific numbers in some parts of the country, that’s a snapshot in time.
“We should be equally concerned about corporate transient and group travel,” he said. “Corporate transient, the business traveler’s return is the hardest part of this. There are still decisions being made by the Fortune 1000s on reopening and restarting, and that’s just getting back in their offices, not to mention getting back on airplanes.”