REPORT FROM THE U.S.—Looking at the performance dynamics of the hospitality industry, many prognosticators have stated that demand is peaking. However, this statement is somewhat misleading. When people hear that certain performance metrics are peaking, they might infer that the industry is reaching a bubble that may soon burst. However, that is not the case.
True demand includes both satisfied demand (occupied roomnights) and latent demand, which is demand that is currently not accommodated by the existing supply in the market; it exists, but you don't see it in the figures. Occupied roomnights may be peaking, but in many markets that metric is constrained by the lack of supply growth. Each month over the past year we have seen occupied roomnights attain a new record level. Looking at markets such as downtown San Francisco where new supply is negligible, there is certainly a large amount of demand that cannot be accommodated.
Because the amount or even the existence of unsatisfied demand is difficult to tabulate, it is often ignored when discussing the health of the industry. However, latent demand is what truly drives growth in the hotel industry. It creates market compression, it drives room rates higher and it creates the need for new development.
Looking at probable sellout nights (days with more than 90% or 95% occupancy), those data points are both at record levels in most top markets. Already in 2012 through October, there have been more days above 90% and 95% occupancy among the major markets than in any of the prior six years. With one month remaining in 2012, the major markets already far exceed the previous high watermark in probable sellout nights. And this is on a market level, not just the downtown tracts or submarkets. The volume of demand necessary to fill hotels on a market level is a substantial amount. To sell out one night in the greater San Francisco market area, you would need to sell more than 50,000 hotel rooms.
The chart below illustrates the growth in demand compression among the top markets, showing the number of nights with occupancies of more than 90% and the subset of those where occupancies exceeded 95%.
With a record level of sellout occupancies, it seems highly reasonable to assume that there is significant pent-up demand well beyond the tally of occupied roomnights. Moreover, it is probably safe to assume that the overall level of roomnight demand will continue to grow in the coming years.
The factor that is perhaps most compelling about future demand growth is the simple fact that performance is this strong despite the slow pace of the greater economic recovery. The recovery in employment and household income is still lagging (or perhaps, the hotel industry is actually leading, for a change). Once the national economy is operating on all cylinders again, overall demand levels should soar. Add to that, the numerous other factors that will drive demand throughout the next decade, particularly from overseas (improved visa process, new long distance aircraft, Brand USA’s marketing initiatives, retiring baby boomers, etc.).
Again, to say demand growth is peaking is a bit misleading.