Economic trends is impacting US hotels in 2017

The recent US presidential election may serve as a reminder that although the past is our best predictor of the future, it is not consistently reliable, and events will occasionally defy projections. It was a compelling demonstration of behavioral economics in action – the psychology of human behavior trumping statistical facts to explain decision-making. The psychology of human decision-making is often overlooked as we forecast a new year of business. Rather than assign a value of relative good or bad to this fact, let’s be reminded that something unexpected and contrarian may occur, so expect the unexpected.

Our usual leading indicators make me optimistic for continued hotel demand growth in 2017. Historically, US hotel demand growth or decline has moved in tandem with US employment and income figures. The most recent forecasts for unemployment show that unemployment may go down a bit more in 2017 than it already has in 2016. There is no reason to think it will increase. There was also growth in disposable personal income in 2016 – something the US economy had not seen in a very long time. Likewise, corporate profits were strong and the expectation that they remain so has driven an end of year rally in the stock market.

Coupling personal income growth and low unemployment together with strong corporate earnings indicates that both the leisure and corporate traveler have the means to travel and pay for lodging. This is the rational conclusion, and turning again to behavioral economics let’s ask ourselves will the rational outcome be the reality? The University of Michigan's consumer sentiment index indicates consumer attitudes are stable and in fact, above average, so unless there is a disconnect between what the surveyed consumers expressed in the responses and how they will actually behave – yet another subject for behavioral economics – odds are that the demand for hotel rooms will remain stable and probably grow a bit in 2017.

If anything was holding back growth in 2016, it was likely the decline in oil production in the US as well as global decline in demand for fossil fuels. While the oil-related business traveler was missed, hotels may have otherwise benefited from lower oil prices as leisure travelers found travel more affordable. The fossil fuel segment is expected to rebound in 2017. The price of a barrel of oil is finally back above US$50, and OPEC has agreed to cut production. Pending Senate approval, the new administration appears to include people who favor big energy, so an increase in oil and gas production activities may be on the horizon.

Looking at my firm’s activity as we end 2016, out of 40 prospective hotel management opportunities, only eight are existing hotels while thirty-two are development projects. Most of the development deals are not yet capitalized, and I am concerned that hotel development will slow as lenders grow more conservative due to the new bank reserve requirements from Basel III and commercial mortgage–backed securities (CMBS) risk retention requirements from Dodd-Frank that have become effective as of 2016. Insurance companies may fill some of the gaps, and private debt funds are also alternatives, but for these unfinanced projects to become a reality, we may rely upon the new administration’s promised deregulation of banking. This, of course, will need to make us diligent of a coming bubble, but certainly not before the end of 2017.

The impacts of the recent US presidential election is still playing out, therefore it is difficult to make predictions about how it will affect the hotel industry. It would seem that having a hotel developer as president would be a good thing for the hotel industry, but how will the travelling public react, if at all, to an administration ostensibly intent on disrupting the “establishment”? Beyond the oval office, voters in a multitude of jurisdictions passed many ballot measures that will result in additional public funding for green space, land conservation and public transportation. I believe that these are long-term positives for travel and tourism but will likely have little influence on our industry in the near term.