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BY WARREN MARR HM COLUMNIST

T he U.S. lodging industry ended 2017 on a strong note, supported by improving macroeconomic fundamentals and strengthening consumer and business sentiment. Further driving industry performance were dramatic regional increases in demand in Houston and South Florida following hurricanes Harvey and Irma. While revenue-per- available-room growth continued to decelerate in 2017, our revised lodging outlook anticipates that in Q4 2018 the lodging industry will have recorded its 35th consecutive quarter of growth in RevPAR (Figure 1).

As we started 2017, several headwinds, including economic weakness abroad and domestic political

uncertainty, placed moderate pressure on initial forecasts for industry performance. However, demand proved resilient, fueled largely by the leisure transient segment (which, in turn, was buoyed by strengthening consumer spending). While corporate transient demand continues to grow at a sluggish pace, business activity in the overall economy remains relatively strong, as evidenced by a strong fourth-quarter performance in equipment and construction spending, in addition to an optimistic forecast for nonresidential fixed investment.

Supply growth has been relatively tame during this cycle and is expected to reach the long-term average of 2.0 percent this year. Despite continued growth in supply, our outlook anticipates a ninth consecutive year where occupancy does not decline, reaching 66.1 percent

in 2018 (Table 1). As we look ahead, several key factors are expected to drive industry performance in 2018.

Improving consumer and business sentiment: Marking the end of a tumultuous first year, the Tax Cuts and Jobs Act was a significant political win for the Trump administration. The Act is anticipated to have the most positive impact for consumers in the short term (three to five years), reinforcing consumer spending and supporting roomnight demand for hotels. While businesses will certainly benefit from the lowered corporate tax rate, economists at IHS-Markit expect that the economic impact from other elements (such as the offshore earnings repatriation tax holiday) will be muted, as public companies elect to fund share buybacks and dividends as opposed to increases in hiring, investment or production.

Return of favorable supply-demand balance: While we previously anticipated supply growth to exceed demand in 2017, the favorable relationship continued to hum along and is now expected to remain through 2018 (Figure 2), due in no small part to the displacement and construction demand for hotel rooms resulting from hurricanes Harvey and Irma. Overall, demand growth is expected to decelerate from 2.7 percent in 2017 to 2.2 percent in 2018, while an anticipated increase in supply is expected to meet the long-term average of 2.0 percent, resulting in record occupancy levels.

International travel in flux: The U.S. dollar, which can act as a proxy indicator for inbound international travel, steadily weakened in 2017 (Figure 3). A weaker U.S. dollar typically benefits the domestic travel industry, as international visitors find that their local currency is able to purchase more goods and services. However, according to the U.S. Travel Association, inbound international travel actually declined in the first and second quarters of 2017 (latest data available at the time of this writing), even as the U.S. dollar weakened. Political uncertainty and travel restrictions likely played a large role in this decline. However, its November 2017 Travel Trends Index indicates that international travel to the U.S. is expected to moderately increase over the next six months, a key aspect considered in our revised lodging outlook.

Relatively strong macroeconomic and industry fundamentals support our positive outlook for 2018. However, as we are now in our 32nd consecutive quarter of RevPAR growth, our outlook reflects cautious optimism. HM

Warren Marr is a managing director at PwC, specializing in the lodging sector. He can be reached at [email protected]

Economic fundamentals paint compelling picture for 2018

March 2018 | HOTELMANAGEMENT.NET24 TRENDS & STATS

2016 2017 2018

Occupancy 0.0 0.9 0.2

Average Daily Rate 3.2 2.1 2.4

RevPAR 3.2 3.0 2.7

Real GDP 1.8 2.5 2.8

Average Demand 1.5 2.7 2.2

Average Supply 1.5 1.8 2.0

Note: GDP growth is shown on a fourth-quarter-over-fourth-quarter basis. All figures are rounded.

Sources: Bureau of Economic Analysis; IHS Markit (January 2018 forecast); STR; PwC (forecast released January 22, 2018).

Note: Figure shows the value of the U.S. dollar relative to the value of the preset, weighted basket of currencies from the United States’ major trading partners (European Union, Japan, Canada, Great Britain, Sweden and Switzerland.) Source: Federal Reserve Bank of St. Louis and IHS Markit (January 2018 forecast)

125

120

115

110

105

100

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Source: STR (1987 to 2017); PwC (1968-1986; 2018F)

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%

-5.0%

-10.0%

-15.0%

-20.0%

-25.0%

1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

57 Quarters of Positive Growth 37 Quarters of Positive Growth 35 Quarters of Positive Growth

Note: Data represents difference between annual demand and annual average supply growth. Negative values reflect supply growth exceeding demand growth in the respective years. Source: STR (1987 to 2017); PwC (1968-1986; 2018F)