“The end of the cycle is near…but this time we think we mean it.” – Reading the signals at Lodging Conference 2016

In late September several members of the AXIS Architecture + Design team and I joined over 1,600 fellow hospitality industry leaders at the 2016 Lodging Conference. Regular readers of our On The AXIS Blog will no doubt recall that The Lodging Conference is a highly anticipated event on AXIS’ annual event calendar - and for a number of reasons. First off, the 2016 event marked the third consecutive year I was invited to speak as an expert panelist at the conference. Participating on the “Repositioning Your Hotel for Success” panel moderated by Russell C. Savrann, Partner at Sandman Savrann PLLC, the session fostered some amazing discussion on the design and business considerations for repositioning hotels from segment to segment or brand to brand. As well, the 2016 event marked the second year AXIS hosted a welcome reception leading into Tuesday evening’s marquee social festivities and signature pool party. With compelling conversation over canapes and cocktails, it was a pleasure bringing together many of the hospitality industry’s most influential personalities. Our thanks to everyone who was able to join us. But perhaps the most irresistible reason the AXIS leadership team was anticipating this year’s Lodging Conference was on account of the event’s reputation for forecasting the future health of the industry with uncanny accuracy. As close followers of the industry can tell you, 2016 has been a year of mixed signals; guest-side indicators continue to demonstrate bullish performance while at the same time corporate-side indicators strongly suggest this recent boom cycle’s peak is likely behind us. With 2016 continuing to demonstrate the uncertainty the industry endured throughout 2015 - during which the end of the current cycle was already being predicted - the AXIS team and I were very much looking forward to gaining some clarity as to what to expect in 2017. “Enjoy the ride” Unfortunately, for those attendees looking forward to a concrete assessment as to what to expect in the coming quarters, the 2016 Lodging Conference wasn’t ready to commit one way or the other. Perhaps the clearest signal of that reticence was the conference’s unofficial theme. Each year, The Lodging Conference captures the prevailing sentiment in the hospitality industry in a brief statement that serves as the central theme for the event; this year, in an almost teasingly tongue-in-cheek nod to the admission that the fate of this cycle was still in the air, the conference adopted the theme, “Enjoy the ride”. Whether “enjoying the ride” meant capitalizing on the opportunities the coming quarters would present, or if it meant holding-on while the rollercoaster finally crested the highest peak was entirely dependent on what indicators you paid attention to. Consumer spending and guest fundamentals remain solid… As speakers on the conference’s A View From The C-Suite keynote session were quick to point out, if one were to gauge the health of the industry solely based on consumer spending it would be safe to assume the current growth cycle is alive and well. In fact, as Steve Hennis, VP of Consulting and Analytics at STR pointed out, July 2016 saw the highest demand for occupancy ever. Undeniably, the juggernaut of the current cycle has slowed somewhat with increases in RevPAR less impressive than they have been in recent years (apologetically receding to historical norms near $80), but on the aggregate, consumer fundamentals continue to show steady growth. As far as anyone at The Lodging Conference was willing to guess, the prevailing sentiment was that current growth would continue for the foreseeable future. …but industry indicators hint at trouble to come While consumers with their spending appear willing to do their part to keep the current growth cycle humming, the industry itself seems less willing. As Adam Lair, Managing Director at HVS captured it with his input on the A View From The C-Suite panel, “We’ve had this dramatic dislocation between the transaction market and what’s actually going on in underlying hotel fundamentals.” Of those transaction market indicators that start to raise flags is the 52% drop in transaction volume year-over-year. REITS have largely retreated from active development, and with many funds trading below asset value many are much less willing to consider significant transactions. To mirror the recent and monumental Marriott-Starwood merger, an increasing portion of transactions are mergers and acquisitions of properties as opposed to new developments, a signal that suggests developers are hesitant to initiate new projects until clearer signals prevail. Supply remains strained with 180,000 keys currently under development, with an anticipated 250,000 in the pipeline in the coming year. The continuing decrease in credit appetite looks to continue to challenge the market’s appetite for increased supply, and is likely to continue to strip even more momentum from the current cycle. External influences may sway the balance As Oxford Economics’ Aran Ryan’s input on The View From The C-Suite panel suggests, much of the uncertainty on the current cycle may lie in influences out of the industry’s control. With the fallout from Brexit still yet to be seen, the November election likely to influence credit markets for at least a number of quarters, the continuing threat of China’s credit exposure in the industry increasingly vulnerable to global influences, and the threat of interest rate increases hinging on a number of unpredictable factors, perhaps the fate of the current cycle is yet to be determined. Curiously, in the weeks following The Lodging Conference, Hilton adjusted their RevPAR expectations for Q3 2016 by roughly 50% from ~4% to a concerningly low ~1.5%, that despite STR’s prediction of a 5% RevPAR across the industry for the coming quarters. Perhaps this is exactly what The Lodging Conference meant with their suggestion, or warning, that we “enjoy the ride.”

By Cory Creath, Principal Architect at AXIS/GFA Architecture + Design

In late September several members of the AXIS/GFA Architecture + Design team and I joined over 1,600 fellow hospitality industry leaders at the 2016 Lodging Conference.  Regular readers of our On The AXIS Blog will no doubt recall that The Lodging Conference is a highly anticipated event on AXIS’ annual event calendar – and for a number of reasons.

First off, the 2016 event marked the third consecutive year I was invited to speak as an expert panelist at the conference.  Participating on the “Repositioning Your Hotel for Success” panel moderated by Russell C. Savrann, Partner at Sandman Savrann PLLC, the session fostered some amazing discussion on the design and business considerations for repositioning hotels from segment to segment or brand to brand.

As well, the 2016 event marked the second year AXIS hosted a welcome reception leading into Tuesday evening’s marquee social festivities and signature pool party.  With compelling conversation over canapes and cocktails, it was a pleasure bringing together many of the hospitality industry’s most influential personalities.  Our thanks to everyone who was able to join us.

 

AXIS/GFA Architecture + Design hotel architect Rory Carroll attends The Lodging Conference 2016 festivities.

Rory Carroll, AXIS/GFA Architecture + Design Principal Architect
takes in the festivities at The Lodging Conference 2016

 

But perhaps the most irresistible reason the AXIS leadership team was anticipating this year’s Lodging Conference was on account of the event’s reputation for forecasting the future health of the industry with uncanny accuracy.  As close followers of the industry can tell you, 2016 has been a year of mixed signals; guest-side indicators continue to demonstrate bullish performance while at the same time corporate-side indicators strongly suggest this recent boom cycle’s peak is likely behind us.  With 2016 continuing to demonstrate the uncertainty the industry endured throughout 2015 – during which the end of the current cycle was already being predicted – the AXIS team and I were very much looking forward to gaining some clarity as to what to expect in 2017.

“Enjoy the ride”

Unfortunately, for those attendees looking forward to a concrete assessment as to what to expect in the coming quarters, the 2016 Lodging Conference wasn’t ready to commit one way or the other.  Perhaps the clearest signal of that reticence was the conference’s unofficial theme.  Each year, The Lodging Conference captures the prevailing sentiment in the hospitality industry in a brief statement that serves as the central theme for the event; this year, in an almost teasingly tongue-in-cheek nod to the admission that the fate of this cycle was still in the air, the conference adopted the theme, “Enjoy the ride”.  Whether “enjoying the ride” meant capitalizing on the opportunities the coming quarters would present, or if it meant holding-on while the rollercoaster finally crested the highest peak was entirely dependent on what indicators you paid attention to.

Consumer spending and guest fundamentals remain solid…

As speakers on the conference’s A View From The C-Suite keynote session were quick to point out, if one were to gauge the health of the industry solely based on consumer spending it would be safe to assume the current growth cycle is alive and well.  In fact, as Steve Hennis, VP of Consulting and Analytics at STR pointed out, July 2016 saw the highest demand for occupancy ever.  Undeniably, the juggernaut of the current cycle has slowed somewhat with increases in RevPAR less impressive than they have been in recent years (apologetically receding to historical norms near $80), but on the aggregate, consumer fundamentals continue to show steady growth.  As far as anyone at The Lodging Conference was willing to guess, the prevailing sentiment was that current growth would continue for the foreseeable future.

…but industry indicators hint at trouble to come

While consumers with their spending appear willing to do their part to keep the current growth cycle humming, the industry itself seems less willing.  As Adam Lair, Managing Director at HVS captured it with his input on the A View From The C-Suite panel, “We’ve had this dramatic dislocation between the transaction market and what’s actually going on in underlying hotel fundamentals.”  Of those transaction market indicators that start to raise flags is the 52% drop in transaction volume year-over-year.  REITS have largely retreated from active development, and with many funds trading below asset value many are much less willing to consider significant transactions.  To mirror the recent and monumental Marriott-Starwood merger, an increasing portion of transactions are mergers and acquisitions of properties as opposed to new developments, a signal that suggests developers are hesitant to initiate new projects until clearer signals prevail.  The continuing decrease in credit appetite also looks to continue to strip even more momentum from the current cycle.

Adding to the confusion is the industry’s indecision on the current state of the hotel development pipeline.  Depending on the scale of your yardstick your view changes; at the macro/industry metric level, the market is already overbuilt and about to oversupply with the rooms currently in the pipeline; at the local market level, plenty of markets appear capable of benefiting from even more development.  STR’s April 2016 report on the year-over-year comparison of the US hotel pipeline hints that a risk of oversupply may be the case; with over 161,000 rooms in development earlier this year – a number that represents a whopping 28.3% increase over 2015’s already record-breaking numbers – the risk of oversupply can’t be ignored.

External influences may sway the balance

As Oxford Economics’ Aran Ryan’s input on The View From The C-Suite panel suggests, much of the uncertainty on the current cycle may lie in influences out of the industry’s control.  With the fallout from Brexit still yet to be seen, the November election likely to influence credit markets for at least a number of quarters, the continuing threat of China’s credit exposure in the industry increasingly vulnerable to global influences, and the threat of interest rate increases hinging on a number of unpredictable factors, perhaps the fate of the current cycle is yet to be determined.  Curiously, in the weeks following The Lodging Conference, Hilton adjusted their RevPAR expectations for Q3 2016 by roughly 50% from ~4% to a concerningly low ~1.5%, that despite STR’s prediction of a 5% RevPAR across the industry for the coming quarters.  Perhaps this is exactly what The Lodging Conference meant with their suggestion, or warning, that we “enjoy the ride.”

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