Hospitality Stockwatch – August 2024

Authors
Arun Upneja, Ph.D. MBA, Dean, Boston University School of Hospitality Administration
Steve Kent, Ph.D., CFA, Assistant Professor, Molloy University-School of Business

Shifting to the Supply Side 

For the past four years, most hospitality operators/investors have been focusing on the drivers of demand. Covid, a recession, corporate and consumer financial assistance, unemployment, inflation, consumer sentiment, and other sector-specific factors have shifted the demand curve back and forth for our industries.  These demand drivers have impacted rates, occupancy, same-store sales, casino spend per position, timeshare volume and airline load. rental days and all the other key performance indicators in the world of hospitality and tourism. There is no shortage of ways to examine the impact of exogenous and economic factors on the demand side of all 18 subsectors that we examine in the Hospitality Stockwatch. 

But what about the supply side of the equation? Most investors look at the recent history of growth in supply, rather than the absolute level, and then compare it to the recent growth in demand.  *For example, according to STR/CoStar, in May 2024, hotel supply grew by 0.5%, and demand grew by 2.4%.  In June, supply once again grew by 0.5%, but demand only grew by 0.4%.  The supply/demand imbalance would suggest May was a good month, but June may have shown softness. In fact, RevPAR (occupancy and average daily rate) did decelerate modestly from 4.0% to 0.5%. 

It could be time to start to look at the absolute level rather than just the growth rate and examine what that growth rate means in capacity on a much larger basis (the actual and absolute increases in supply over time compared to the larger initial amount) in other industries, from office to oil to retail, this focus is on the total level of capacity in addition to year-over-year growth. Here are some sobering statistics to consider: according to STR/CoStar’s Census measure, the number of rooms has increased from 3,138,886 in January 1988 to 5,582,708 in January 2024: a 77% increase over 27 years.  In contrast, the US population, one source of demand, has only grown 38% during the same period. Supply more than doubled relative to number of people in the market.  

If we look at more recent history, in the past ten years, the number of hotel rooms has increased 11.2% but the US population has only grown 5.8%. We note that these supply statistics do not include Airbnb, timeshare units, and other alternatives for travel stays. We also note that the US population is not the only source of demand. However, the combination of hotel rooms with other accommodations creates capacity levels that do not seem to be slowing.  It is not just in rooms.  **A recent Goldman Sachs report shows that in 1998 there were roughly 180,000 cruise berths. In 2023, that number was 666,589 (a 270% increase from 1998). By 2027, it will be 785,552 (a 330% increase). 

Another reason we need to look at supply is the base is getting bigger. Stating the obvious: a 3% increase in supply for the hotel sector was 94,166 rooms in 1988 while a 3% increase in supply for 2024 rooms is 167,481. While some take comfort in that supply is only growing 2-3%, they may be forgetting how big the base has become.  Another issue is which sectors are growing, and which have the ability to adjust quickly. Airlines and car rentals seem to be able to adjust capacity faster. Amusement park capacity increases is minimal, and casino market growth is moderating. 

We acknowledge that the demand side of the equation is fueled by many factors bleisure (combination of business and leisure travel), international travel, remote work, lower cost air travel, etc.).  We also acknowledge that looking at supply broadly does not capture the nuances of specific market growth and capacity. However, in university Economics classes, we tell students to look at BOTH demand and supply. Perhaps hospitality investors should start to do the same.  We obsessed over demand for the past four years, but the time is to switch attention to the supply side. 

Click here to download Hospitality Stockwatch – Current as of August 1, 2024
View previous Hospitality Stockwatch Issues

Winners and Losers 

The next few weeks will be pivotal for the 120 companies in the Hospitality Stockwatch as the vast majority of our stocks will start to report Q2 results.  So far, it has been a mixed bag for Las Vegas Sands and McDonald’s which showed softening revenue, while Marriott lowered expectations for the balance of 2024.  In contrast, Red Rock Resorts and Boyd Gaming showed solid results suggesting the mid-market consumer may not be as weak as expected. 

Overall, July broad market trends were in the middle of the road with the S&P 500 up 1.1%, still being shifted around by the mega cap tech stocks. However, there seems to be renewed interest in other sectors with the Russell 3000 (broader and smaller capitalization stocks) up slightly more at 1.8%.