The State of the U.S. Hotel Industry

by: Wall Street Strategies

By Conley Turner

The US hotel industry is currently staging a recovery from the cyclical lows brought on by the global financial crisis and the Great Recession. Driving the revival are corporate travelers and to a lesser degree, the group and leisure segments. While many hotel companies are collectively breathing a tempered sigh of relief, a substantial number of these operators are also seeking to expand their footprints internationally.

Domestic Environment

The recession has had a particularly deleterious impact on the lodging industry. Traveling volume fell sharply very much at the onset of the crisis and lodging operating metrics of RevPAR (revenue per available room) and the average daily room rate (ADR) deteriorated accordingly. Operators responded by implementing cost containment initiatives and many engaged in a significant amount of promotional activity. Room rates were discounted across the various hotel segments in order to stop the hemorrhaging. In fact, at one point in 2009, the average hotel room rate in the U.S. was declining faster on a percentage basis than the average hotel occupancy rate during that period.

Flash forward to present day and the domestic operating environment for lodging companies is improving markedly. The economy is picking up and corporate travel budgets are being replenished as a result. Furthermore, the group and leisure segments are also bouncing back though not yet to pre-crisis levels.

Many hotel companies also benefitted from the fact that they have been migrating to a fee for service business model for some time. This enabled many hotel companies to better weather the economic cycle as that business model afforded them a more consistent stream of revenue.

The Upscale Brands

As the performance of the US hotel industry improves, there has been a corresponding increase in the demand for hotel rooms in the upscale segment. Some context is important here as it is this luxury segment that was hit the hardest during the worst of the crisis. Conversely, it is the upscale segment that is leading the charge back.

This stems from the fact that corporate travelers are much less price sensitive than customers of economy hotels who will likely react to small price differentials. Operators in the upscale segment have been able to demonstrate a fair amount of pricing power coupled with the ability to increase occupancy.

This ability to increase prices is important as it translates into a higher RevPAR result. An increase in operating expense is the flip side of higher occupancy levels. If an operator has no pricing power to act as an offset, then occupancy increases by way of room rate reductions leads to compressed margins and reduced RevPAR. As it stands, those hotel operators on the upper end of the scale maintain a competitive advantage and therefore, have been relative outperformers.

International Expansion

Many hotel companies have turned to developing countries as a way of growing their various brands. Attracted by their robust pace of GDP growth, these operators are seizing on the opportunity to expand their geographical footprint. In fact, the revenue generated from international operations now factors prominently in the overall results of many hotel companies.

As it stands, the Asia Pacific region is garnering the most amount of interest with China capturing the lion's share of actual investments. Most of the leading hotel companies of such as Intercontinental, Marriott and Starwood have established a presence in the region and continue to add more properties to their portfolios as it represents a prolific source of growth. Marriott is a clear standout in this regard with China being the company's largest market outside North America. The company anticipates having 60 hotels open across six brands to be opened in China by the end of 2010 and to double that number in five years.

Economic Outlook

The economic landscape in the US continues to be challenging with the ongoing recovery best being characterized as fragile. Among the most disconcerting issues to be addressed is the fact that unemployment remains persistently high with scant optimism for a short term reversal. This is a key consideration in the resilience of any economic recovery and by extension could realistically temper the rebound occurring in the lodging space.

Should the economy actually falter or undergo a double dip recession, it is those hotel operators with poor balance sheets that will suffer. Furthermore, those operators that have engaged in significant discounting will likely to be affected by the lasting impact of this decision. Longitudinal studies on the matter point to the conclusion that hotel operators that reduce room rates relative to their competitors did see an increase in occupancy but RevPAR suffers. The ability to raise prices even while increasing occupancy resulted in net RevPAR increases however.


As it stands, the overall operating environment for hotels is improving but the durability of the recovery remains unclear. Those hotel operators with pricing power have a considerable advantage over their peers and are best positioned to benefit should the operating environment continue to improve. Furthermore, the expanding global footprint of many of these companies increases their revenue and earnings visibility. Overall, the outlook for the lodging sector appears promising.

Disclosure: No positions