[video transcription]
Hello, my name is Jan Freitag, and here is what’s on CoStar’s radar for this month. We’re going to look at the November preliminary data, talk a little about profitability and consumer sentiment and as the year turns, Adam Sacks will join me to talk about 2023. Let’s get started.
The preliminary demand data continues the trend of monthly results coming in at or around the data from three years ago. November room demand was 1.2% or roughly 1.2 million rooms below the 2019 results. It is clearly just a question of time until we see monthly demand counts finally top 2019.
Room rates compared to 2019 showed another month of double-digit growth. This is no surprise, but what continues to worry owners and managers is that in real terms, ADR was actually 0.7% below 2019 results. In other words, inflation is so strong that it eats up all the gains made on the rate front.
So that’s really the story of 2022, right? That we record really strong ADR growth, but almost nothing is left over because of the sharp cost increases. So, let’s look at the October P&L data that was just released for a little bit more detail on the top and the bottom line
In this chart, in the bottom row, you see the October results compared to October 3 years ago, shown as an index, so Total RevPAR is about 3% higher than it was. The good news is that GOP and EBITDA per available room are both back to pre-pandemic levels. On the right, you see that labor costs are basically back to where they were in 2019 as well. According to the BLS, the industry is still missing workers, so what that data means is that the existing workers are on the clock longer, but also that hourly wages have increased.
Translating this to the local level creates this chart. Probably not a huge surprise to anyone but markets that have strong leisure appeal such as Miami, San Diego, or Nashville now produce total revenue and GOP above 2019 levels. But on the other side, markets such as San Francisco, Atlanta, Minneapolis, or Washington D.C. which are so dependent on group and corporate transient demand are still well off their 2019 revenues. And that means that GOP is also still 20-30% below where it was. And then, of course, you have San Francisco where the lack of rooms and F&B revenue, plus union labor costs, creates a really tough situation.
But that’s really backward-looking data, right? What about forward-looking? What are the travelers’ intention into 2023? Luckily, STR’s Chris Klauda has some insights, hot off the press:
Here’s an easy question with a not-so-easy answer: are you traveling more, the same, or less, in ’23 compared to 2019? You see that the red, less, outweighs the green, more, for all answers. What are travelers saying they’re doing less of? One-on-one meetings with colleagues and going back to the mothership. And, sorry, vendors, we’ll see you on Zoom. But what stands out to me is that half the respondents say that they will maintain their group interactions, be it for events and training. And some will actually increase that travel.
It's not a completely rosy picture for next year but keep in mind, we are also expecting a mild recession. So, let’s talk about next year with the smartest guy in the room, in any room, the president of Tourism Economics, Adam Sacks. I asked him what keeps him up at night when he thinks about 2023:
“I think when we look at the outlook for lodging in the next year, the biggest concern would be what consumers are doing as far as debt and the potential that that could undercut the leisure market. If you combine that with the eroding purchasing power inflicted by inflation, that what has been really the catalyst for the recovery and as the bedrock for the lodging demand on the consumer and leisure side could get knocked on its heels in the coming year.”
What makes you feel optimistic about the next year?
“There are a lot of things that make me feel, let’s say, a subdued optimism if I can qualify the type of optimism that I feel. And the reason I’d say it’s a subdued optimism is that we expect travel demand to continue to grow and lodging demand to continue to grow in 2023, in the face of a mild recession which has never happened before. Why? There are a few reasons why I think we can still be optimistic even as we reckon with the prospects of a recession. The first is that we see continued momentum in bookings and in intentions to travel and the weekly and the monthly data from STR are showing continued forward momentum. That’s in the midst of a pretty choppy environment that we’ve had over the last, let's say, 10 months. That’s with inflation being really high, confidence falling, and travel just continues to move forward across all metrics. That would be the first one: momentum.
The second reason for optimism is household balance sheets. While debt is a concern, overall households do have a low debt service rate and a significant amount of savings. In fact, 1.7 trillion dollars remains in accumulated savings from the last two and a half years. That being concentrated on the upper half of income earners who are our main travelers.
Third, I would add sentiment data for travel seems to indicate people are still prioritizing services, experiences, and travel over goods, and the data from the BEA support that as well and so this idea of pent-up demand is not going away in the coming year.
And fourth is that business travel is continuing to rebuild and that even while the economic tide may be going out, the business travel tide of rebuilding to normal patterns of business is still coming in. And so, all of those things combined, give me the view that we’re going to see travel to prevail through this period of economic softness in 2023.”
Clear. Concise. To the point. I told you he is the smartest guy in the room. Adam, thanks so much for joining us and for spreading some good cheer as we look forward to 2023.
To wrap it up: let me thank you for watching for another year, for your engagement, and for all your questions. If you celebrate Christmas I wish you a very merry Christmas, froeliche Weihnachten, and a great start to the new year. And we’ll see you back here in 2023. Until then I wish you well, I wish you health.