Demand for hotels in Greater Los Angeles remains strong, with steady occupancy and increasing room rates expected for 2020
Los Angeles – CBRE Hotels Research forecasts that revenue growth will continue to diminish, but the U.S. lodging industry will remain strong through the next two years. As outlined in the December 2019 edition of Hotel Horizons®, U.S. occupancy levels will dip slightly, but remain above 65.5 percent through 2021, 300 basis points greater than the STR long-run average. Concurrently, rooms revenue per available room (RevPAR) is forecast to increase at less than 1 percent per year during the same time frame.
“Throughout the recovery from the Great Recession, we have seen the U.S. lodging industry deviate from economic norms,” said R. Mark Woodworth, senior managing director, CBRE Hotels Research. “Despite an economy that has supported strong growth in lodging demand and record occupancy levels, hoteliers have been unable to achieve gains in average daily rate (ADR) commensurate with what we have seen during equally strong market conditions. We believe an environment of high occupancy with low ADR growth will persist for the foreseeable future.”
Demand for hotels in the Greater Los Angeles area is forecast to remain strong next year, with occupancy across all product types essentially on par with 2019 at 79.6 percent and average daily room rates set to increase 2.6 percent to $185.43. Revenue per available room, a measure of occupancy and rate, is set to climb 2.5 percent next year to $147.52 in the region.
“Even while absorbing higher-than-long-term average growth in supply over the past several years, Los Angeles continues to operate at strong levels of occupancy and above-national-average rate growth, and that is a trend expected to continue in 2020,” said Bruce Baltin, managing director of CBRE Hotels’ Consulting. “Growth in demand is being driven across all three major lodging sectors in the region. Los Angeles benefits from strong inbound international travel as a Pacific gateway market, while leisure demand is up, and particularly the growth of the technology sector is helping to maintain business travel.”
U.S. lodging industry performance in 2019 exemplifies the new marketplace. The CBRE forecast for the change in lodging demand during the year has improved from a 1.8 percent gain in the September 2019 edition of Hotel Horizons®, to a 2 percent increase in the current edition. The updated outlook calls for the national occupancy rate to remain at the 66.1 percent record level achieved in 2018. This marks the 10th consecutive year without a national occupancy decline.
While supply and demand appear to be balanced, room rate growth potential remains limited. CBRE now is forecasting the annual ADR for U.S. hotels in 2019 to be $131.08, just 0.9 percent over the $129.97 national average in 2018. The net result is a RevPAR increase of only 0.8 percent for the year.
Cycle Within the Cycle Beyond 2019, CBRE forecasts national occupancy levels to decrease in 2020 and 2021, but at a slower pace than forecast 90 days ago.
“We believe that uncertainty, tighter lending requirements and escalating construction costs will mitigate the volume of new supply and risk of oversupply. Concurrently, the economy continues to support the demand for lodging accommodations, thus perpetuating occupancy levels above 65.5 percent,” Woodworth noted.
CBRE reduced its forecasts for ADR growth to below 1.5 percent through 2022. Not only does this result in a lack of real ADR gains, but the low ADR gains limit RevPAR growth to under 1 percent through 2021. CBRE forecasts nominal RevPAR growth rates of 2.1 and 3.5 percent in 2022 and 2023 respectively. This will represent real RevPAR gains of 0.3 percent in 2022 and 1.5 percent in 2023.
Profit Challenges
In a low revenue growth environment, hotel operators’ ability to expand profits will be tested. Low levels of unemployment continue to put upward pressure on salaries and wages which make up half of the expenses at the typical U.S. property.
CBRE’s inflation forecasts remain below 2 percent through 2022, controlling the cost of the goods and services other than labor. However, with RevPAR growth limited to less than 1 percent, hoteliers must keep expense growth to under 1.5 percent to achieve nominal gains in gross operating profits.
“Considering expenses have increased at an average annual pace of 4 percent since 1960, the challenge ahead is clear,” Corgel added. “Of course, this is all tempered by the fact that GOP margins are near their all-time high.”
“Despite the 2020 and 2021 forecast performance slowdown, U.S. hotels are operating at near record levels of occupancy and efficiency. The growth story is not great, but we expect the U.S. lodging industry to circle back to 2018 performance levels, and beyond, starting in 2022,” Woodworth concluded.
The December 2019 edition of Hotel Horizons® for the U.S. lodging industry and 60 major markets can be purchased by visiting: https://pip.cbrehotels.com
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CBRE Hotels is a specialized advisory group within CBRE providing capital markets, consulting, investment sales, research and valuation services to companies in the hotel sector. CBRE Hotels is comprised of more than 385 dedicated hospitality professionals located in 60 offices across the globe.
Los Angeles – CBRE Hotels Research forecasts that revenue growth will continue to diminish, but the U.S. lodging industry will remain strong through the next two years. As outlined in the December 2019 edition of Hotel Horizons®, U.S. occupancy levels will dip slightly, but remain above 65.5 percent through 2021, 300 basis points greater than the STR long-run average. Concurrently, rooms revenue per available room (RevPAR) is forecast to increase at less than 1 percent per year during the same time frame.
“Throughout the recovery from the Great Recession, we have seen the U.S. lodging industry deviate from economic norms,” said R. Mark Woodworth, senior managing director, CBRE Hotels Research. “Despite an economy that has supported strong growth in lodging demand and record occupancy levels, hoteliers have been unable to achieve gains in average daily rate (ADR) commensurate with what we have seen during equally strong market conditions. We believe an environment of high occupancy with low ADR growth will persist for the foreseeable future.”
Demand for hotels in the Greater Los Angeles area is forecast to remain strong next year, with occupancy across all product types essentially on par with 2019 at 79.6 percent and average daily room rates set to increase 2.6 percent to $185.43. Revenue per available room, a measure of occupancy and rate, is set to climb 2.5 percent next year to $147.52 in the region.
“Even while absorbing higher-than-long-term average growth in supply over the past several years, Los Angeles continues to operate at strong levels of occupancy and above-national-average rate growth, and that is a trend expected to continue in 2020,” said Bruce Baltin, managing director of CBRE Hotels’ Consulting. “Growth in demand is being driven across all three major lodging sectors in the region. Los Angeles benefits from strong inbound international travel as a Pacific gateway market, while leisure demand is up, and particularly the growth of the technology sector is helping to maintain business travel.”
U.S. lodging industry performance in 2019 exemplifies the new marketplace. The CBRE forecast for the change in lodging demand during the year has improved from a 1.8 percent gain in the September 2019 edition of Hotel Horizons®, to a 2 percent increase in the current edition. The updated outlook calls for the national occupancy rate to remain at the 66.1 percent record level achieved in 2018. This marks the 10th consecutive year without a national occupancy decline.
While supply and demand appear to be balanced, room rate growth potential remains limited. CBRE now is forecasting the annual ADR for U.S. hotels in 2019 to be $131.08, just 0.9 percent over the $129.97 national average in 2018. The net result is a RevPAR increase of only 0.8 percent for the year.
Cycle Within the Cycle Beyond 2019, CBRE forecasts national occupancy levels to decrease in 2020 and 2021, but at a slower pace than forecast 90 days ago.
“We believe that uncertainty, tighter lending requirements and escalating construction costs will mitigate the volume of new supply and risk of oversupply. Concurrently, the economy continues to support the demand for lodging accommodations, thus perpetuating occupancy levels above 65.5 percent,” Woodworth noted.
CBRE reduced its forecasts for ADR growth to below 1.5 percent through 2022. Not only does this result in a lack of real ADR gains, but the low ADR gains limit RevPAR growth to under 1 percent through 2021. CBRE forecasts nominal RevPAR growth rates of 2.1 and 3.5 percent in 2022 and 2023 respectively. This will represent real RevPAR gains of 0.3 percent in 2022 and 1.5 percent in 2023.
Profit Challenges
In a low revenue growth environment, hotel operators’ ability to expand profits will be tested. Low levels of unemployment continue to put upward pressure on salaries and wages which make up half of the expenses at the typical U.S. property.
CBRE’s inflation forecasts remain below 2 percent through 2022, controlling the cost of the goods and services other than labor. However, with RevPAR growth limited to less than 1 percent, hoteliers must keep expense growth to under 1.5 percent to achieve nominal gains in gross operating profits.
“Considering expenses have increased at an average annual pace of 4 percent since 1960, the challenge ahead is clear,” Corgel added. “Of course, this is all tempered by the fact that GOP margins are near their all-time high.”
“Despite the 2020 and 2021 forecast performance slowdown, U.S. hotels are operating at near record levels of occupancy and efficiency. The growth story is not great, but we expect the U.S. lodging industry to circle back to 2018 performance levels, and beyond, starting in 2022,” Woodworth concluded.
The December 2019 edition of Hotel Horizons® for the U.S. lodging industry and 60 major markets can be purchased by visiting: https://pip.cbrehotels.com
* * *
CBRE Hotels is a specialized advisory group within CBRE providing capital markets, consulting, investment sales, research and valuation services to companies in the hotel sector. CBRE Hotels is comprised of more than 385 dedicated hospitality professionals located in 60 offices across the globe.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2019 revenue). The company has more than 100,000 employees (excluding affiliates) and serves real estate investors and occupiers through more than 530 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.
CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2019 revenue). The company has more than 100,000 employees (excluding affiliates) and serves real estate investors and occupiers through more than 530 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.
