Pandemic adds new variable to industry forecasting

Home Hotel & Lodging Pandemic adds new variable to industry forecasting
Pandemic adds new variable to industry forecasting

The coronavirus pandemic has changed every prediction about U.S. hotel performance in 2020, including how industry analysts make their forecasts.

Advertisements

As companies such as STR, Tourism Economics, CBRE and PwC have had to revise their 2020 forecasts, in some cases multiple times, those creating the forecasts have had to change how they weigh various factors and consider new variables introduced by COVID-19. STR is the parent company of Hotel News Now.

STR and Tourism Economics

The three numbers STR tries to forecast are supply, demand and average-daily-rate growth, said Jan Freitag, SVP of lodging insights. From supply and demand, STR can figure out occupancy changes, and that coupled with ADR changes reveals revenue-per-available-room changes.

“You look at each of the components, and you say what is still true and what is no longer true,” he said.

On the supply side, there’s a high likelihood that most but not all of the projects in the ground today will open, although some might be delayed, Freitag said. However, the total number of rooms in construction will decrease as projects open and fewer projects break ground. A severe decline in the construction pipeline would be driven by a variety of reasons but mostly by uncertainty about the future and for a lack of debt capital as people don’t know how to underwrite a deal.

Room demand has historically been connected to GDP growth, he said. When the American economy contracts, there’s a recession and room demand declines as well. However, with the pandemic, “the magnitude of the demand decline is completely unhinged from any relationship to GDP,” he said. Travel has dried out completely in an unprecedented way.

While the relationship between demand and GDP isn’t as close as it once was, Freitag doesn’t believe it’s nonexistent. The unemployment numbers are another complication, and those who are unemployed or underemployed are putting off travel to pay for other things like food and their mortgages, he said.

Room rates are the trickiest part of the equation, Freitag said. Everyone can count cranes and permits pulled in city halls, and they can even make assumptions about how people are traveling, but what people are paying for their rooms is the “real wildcard” in this recovery scenario.

When the economy opens back up and people begin traveling again, but perhaps at smaller numbers, hoteliers will try to entice them to their hotels, and the easiest way to do that is through offering deals and discounts, he said.

“That will have a significant impact on room-rate declines or a lack of room-rate growth,” Freitag said. “What that looks like is very hard to predict. We will try it, and we will do it. We will come up with a number, and it will likely be wrong. We just don’t know which way.”

Under normal circumstances, Tourism Economics has a quarterly process in which it takes the most recent quarter’s historical hotel data and most recent Oxford Economics macro forecast and put them together to run its models, said Aran Ryan, director of lodging analytics at Tourism Economics, an Oxford Economics company.