Navigating the slowdown

Adam Sacks

President

Tourism Economics

February 2020

US ECONOMY AND HOTEL INDUSTRY 2020 OUTLOOK

Agenda

Outlook for the economy

State of the US lodging sector

Travel sector prospects

Lodging outlook

ECONOMIC OUTLOOK

Global activity recently showing signs of bottoming out

30

35

40

45

50

55

60

65

2000 2003 2006 2009 2012 2015 2018

Services Manufacturing

Source : Oxford Economics/Markit

World: PMIs

Index

Expansion

Contraction

And leading indicators pointing to early-2020 pick up

-3

-2

-1

0

1

2

3

4

5

6

30

35

40

45

50

55

60

65

2001 2004 2007 2010 2013 2016 2019

Global composite PMI (Adv two months, LHS)

Global GDP (RHS)

Index

Source : Oxford Economics/Haver Analytics/Markit

World: GDP & PMI

% y/y

But then the coronavirus hit…

This time is different because of China’s global role

0

2

4

6

8

10

12

14

16

18

GDP Total imports Non-food and non-energyintermediate exports

2003

2018

China's importance to the world economy

Source : Oxford Economics/Haver Analytics

% of total • China share of overseas

travel to the US

• 1% in 2002

• 7% in 2019

• China is the #1 source of

international travel

spending in the US

Asia worst affected but US and eurozone not untouched

-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

China Asia Pacific US Eurozone World

2020 2021

GDP revisions due to coronavirus

Source : Oxford Economics/Haver Analytics

pp revision to annual GDP growth

US trade flows have stalled

Corporate profits have narrowed

Investment intentions have fallen sharply

Global trade slowdown is having its effect

Services have been more resilient

The long, steady expansion has pulled unemployment down to 3.5%

The unemployment rate is the lowest its been in over 50 years (May 1969 it was 3.4%).

Household wealth has improved, and households have de-leveraged

Wages continue to outpace inflation

Despite recent volatility, consumer confidence is buoyant

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2016 2017 2018 2019 2020

Impact of BBA, 2018

Impact of TCJA, 2017

Source: Oxford Economics

US: Policy tailwinds diminish over timeReal GDP growth, Q4/Q4

BBA, 2018 = Bipartisan Budget Act of 2018TCJA, 2017 = Tax Cuts and Jobs Act of 2017

+1.0ppt

+0.3ppt

A slower 2020 is inevitable

STATE OF THE US LODGING INDUSTRY

TRAVEL PERSPECTIVES

People are traveling more than ever

2.7

3.2

3.7

4.2

87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21

Room nights per capita, USAnnual room nights

Note: Seasonally adjustedSource: STR; Tourism Economics

2019 Q4: 3.9 room nights

per capita

Even in “severe recession” occupancy rates are higher than in the past three

2020 Severe Recession62.8%

1990-91 Recession62.0%

2001 Recession59.0%

2008-09 Recession54.6%

50%

55%

60%

65%

70%

1988 1992 1996 2000 2004 2008 2012 2016 2020

Hotel Occupancy RateLevels

Mild RecessionSevere RecessionBaseline

Source: STR, Tourism Economics

International inbound performing as expected

“We expect inbound travel

performance to remain tepid

in 2019 consistent with

recent monthly trends.”

Tourism Economics, January 2019

• After averaging growth of 6.4%

from 2011-2016, overseas

travel to the US has slowed

markedly.

6.4%

2.0%2.5%

1.3%

-1.4%-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

Average2011-2016

2017 2018 2019 2020 YTD

Overseas Visits to the US% change

Source: NTTO, Tourism Economics

For total inbound, a recession is underway

• Negative performance in 8 out of

11 months this year

• Total inbound is down -1.1%

through November of 2019

-8.0%

-4.0%

0.0%

4.0%

8.0%

12.0%

16.0%

US international inbound arrivals

Source: NTTO, StatCan, Banco de Mexico

% change y/y

A wide mix of performance last year

• Key emerging markets,

including China and

Brazil, contracted in 2019.

• Spain, Japan, and India

posted robust results.

-10% -5% 0% 5% 10%

Spain

Japan

India

France

South Korea

United Kingdom

Switzerland

Italy

Netherlands

Germany

Colombia

Australia

Brazil

China

US Inbound arrivals% change, Jan-Dec 2019

Source: NTTO

Visitors can get sticker shock from currency exchange

• The US is significantly

more expensive to

visitors relative to six

years ago.

50

60

70

80

90

100

110

2013 2014 2015 2016 2017 2018 2019

$US Exchange rates, $/LC2013=100, annual average

Source: Oxford Economics

China (-11%)

Brazil (-45%)

Mexico (-34%)

Canada (-23%)

EU (-16%)Japan (-11%)

UK (-18%)

Coronavirus impacts

• Based on historical precedent, a 25% drop in visits to the US from China is expected in 2020.

• The rest of Asia also likely to see a drop up to 10%.

• 1.6 million visits and $7.7 billion in visitor spending lost in 2020.

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0

50

100

150

200

250

300

350

400

450 Actual

Counterfactual

Source: Tourism Economics

US Arrivals from China, SARS Impact

000s

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500 Counterfactual (no crisis)

Expected outcome

Source: Tourism Economics, NTTO

US Arrivals from China, Coronavirus Impact

'000s

Coronavirus hotel impacts

• 7.5 million hotel room nights will be lost in 2020 alone

• In 2020, 0.6% of US hotel room demand will be forfeited

2020 2021 2022 2023 2024

-0.4%

-0.3%

-0.3%

-0.2%

-0.2%

-0.1%

-0.1%

0.0%

Source: Tourism Economics, STR

US Hotel Room Nights from Chinese Visitors, Coronavirus Impact

% of total hotel room demand

City exposure to China

• Los Angeles and New York City are the largest US city destinations with 1.2 million and 1.1 million overnight visits from China in 2019, respectively.

• As a share of total overseas visitors to each city in 2019, Riverside CA, Los Angeles, and Seattle are most exposed to the Chinese market.

0 200 400 600 800 1000 1200 1400

Atlanta

Orlando

Philadelphia

Miami

Houston

Detroit

San Diego

WashingtonDC

Chicago

Seattle

Honolulu

Las Vegas

Boston

Riverside, CA

San Francisco

NYC

Los Angeles

Overnight Visits from China in 2019000s

Source: Tourism Economics.

0% 5% 10% 15% 20% 25% 30% 35%

Orlando

Miami

Las Vegas

Honolulu

Atlanta

WashingtonDC

NYC

Houston

San Diego

Chicago

Philadelphia

Boston

San Francisco

Detroit

Seattle

Los Angeles

Riverside, CA

Share of Overseas Visits from China in 2019%

Source: Tourism Economics.

Accuracy of current year demand forecasts released in January of each year

Source: STR/Tourism Economics

2.4 2.3

1.7

2.31.9

2.8

1.7

2.72.4

2.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2015 2016 2017 2018 2019

STR/TE January forecast demand growth

Actual demand growth

Demand forecasts have been consistently accurate

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

54%

56%

58%

60%

62%

64%

66%

68%

70%

87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19

Occupancy and ADR growth

Source: STR; Tourism Economics

Occupancy rate

ADR growth (right axis)

Occupancy (left axis)

2019 Q4

ADR growth

…but ADR has been renegade

Recent growth (2018 and 2019)

ADR gains

should be

here

…weak despite levels of occupancy

Compensation costs and ADRLeisure and hospitality sector compensation, index (2005=100)

Year-over-year growth

Note: Compensation costs for leisure and hospitality sector jobs (wages, salaries and benefits at accommodation and food service establishments)

based on Employment Cost Index.

Source: STR; BLS; Tourism Economics

85

95

105

115

125

135

145

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Compensation costs

ADR

0%

1%

2%

3%

4%

5%

6%

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Historical average: 2.3%

Recent average: 3.4%

Compensation cost growth

While increases in costs are eclipsing rate gains

Some pace data showing a rebound

• Weakness in

transient business

demand and in rate

for transient leisure

3.6%

0.8%

3.9%

-0.7%

1.5%

5.1%

-2%

0%

2%

4%

6%

Transient leisure Transient business Group

North America 12-month lodging outlookPerformance pace: Nov 2019 - Oct 2020

Bookings ADR

Source: TravelClick

But the underlying economic data indicate weakness in group

2.5%

5.6%

7.7% 8.0%6.9%

0.6%

-14.5%

4.5%

8.7%9.5%

4.1%

7.2%

1.8%

0.7%

4.4%

6.4%

2.3%

0.6%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Group lodging demand and capex spending

US, annual growth

Note: Capital expenditures measured as nonresidential fixed investment, private, real.

Source: STR; BEA; Oxford Economics

Capex

Group demand

Domestic air travel bookings showing some volatility

• Air passenger bookings

rebounded strongly in

January after a week

finish to 2019

-10%

-5%

0%

5%

10%

15%

Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20

3-mo 6-mo

y/y % change, advance moving-sum (month of booking)

Source: Tourism Economics, ARC

Forward-Looking US Air Travel Bookings

And vacation intentions are holding

• Vacation intentions

remained above prior

year levels in each of

the past 13 months.

0

20

40

60

80

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

US Household Vacation Intentions% planning to take vacation in next six months

2018 2019 2020

Source: Conference Board, Tourism Economics

THE US LODGING OUTLOOK

3.8%4.2%

3.8%

4.7% 4.5%

3.0%

2.2%2.5%

1.0%

0.3%

0.6%

5.6%

4.2%

2.4%

1.4%

3.4%

1.5%

0.1%

0.7%0.4%

0.0%-0.3% -0.1%

-2%

1%

3%

5%

7%

9%

10 11 12 13 14 15 16 17 18 19 20 21

US Occupancy and ADR growth% change

Source: STR; Tourism Economics

ADR contribution

Occupancy contribution

2.9%

0.9%

0.0%

0.5% RevPAR

Expect flat RevPAR in 2020

STR and TE forecast (Jan-2020 release)

RevPAR

• 2018: 2.9%

• 2019: 0.9%

• 2020: 0.0%

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