Back in 2012, I owned a beautiful, black, chromed-out Jeep Liberty SUV. I loved that car. It had leather upholstery, a Garmin GPS built right into the console, SiriusXM radio, heated seats, a moonroof—it was boss.
But, yikes, did it cost an arm and a leg to fill the tank. Remember, this was 2012: a year when the average price of a gallon of gasoline was higher than any year on record. The national average price for the year was $3.60 a gallon, a significant jump from the previous record of $3.51 set in 2011.
I was living in Connecticut at the time, and was consistently paying north of $4 per gallon. It was a bad time for a gas guzzler, like my SUV.
Remember these days?
The reason why gas was so expensive came down to supply and demand. At the time, there were supply shortages in oil due to heightened global demand from the likes of China, weather problems and a not-yet-glut of oil coming from the fields of Texas to North Dakota. Times were then good for oil producers as they were getting top dollar for their product. In February of 2012, oil hit a high of $109.77 per barrel.
Oh, but times do change. On Wednesday, and for the first time since 2003, U.S. oil prices fell below $27 a barrel with, as CNBC points out, traders worried that “the crude supply glut could last longer.”
Oil has fallen more than 25 percent so far this year, the steepest such slide since the financial crisis. Yet suppliers keep pumping more oil into an already oversupplied market, with the likes of OPEC a main culprit. It’s cataclysmic, but, boy, I wish I still had my car. I sold it shortly before gas prices took a dive (of course).
That’s more like it.
The Comparison to Hotels
So what does any of this have to do with hotels? A lot. Here’s why.
The hotel industry gets itself in trouble when it builds too many hotels, too fast. It’s simple supply and demand: When there are too many hotels in the market and demand can’t be sustained—what happens—rates fall.
Luckily, up until now, the hotel industry hasn’t had to deal with oversupply. According to recent Moody’s research, U.S. lodging supply grew 1.4 percent in the fourth quarter of 2015 and demand grew 2.6 percent. I was never good at math, but I know it’s good when demand percentage is higher than supply percentage.
But worry is on the horizon. All the major hotel companies are ramping up their pipeline of new hotels, a trend that began in 2013. Hotel companies are measured by their ability to expand net unit growth, which flies in the face, really, of what they should be concentrating on: using their existing portfolio of hotels to grow revenues for owners. But Wall Street sees it otherwise. The more hotels you can build, the higher your stock price.
Historically, supply growth on a per annum basis grew 2 percent. But the industry hasn’t reached that clip for some time. Until now. Moody’s expects supply growth to approach that magical 2-percent line this year. Moody’s further suggests that muted growth in global economies, along with occupancy being at peak levels, will cause demand growth to slow. That by the end of 2016, supply and demand growth will begin to reach parity (see chart above), signaling that 2017 growth in occupancy, ADR and RevPAR will likely be weak.
This is all too real. Consider Hilton Worldwide: In 2015, the company signed more than 100,000 rooms for development, a record; its pipeline of 275,000 rooms represents 20 percent of rooms under construction worldwide; and it also has launched three new brands in the last three years, with those brands now having 60,000 rooms in various stages of development.
This is all music to the ears of Hilton CEO Chris Nassetta, whose job is, in no small way, measured by how fast and how big he can grow the company. “2016 will be a better year in every regard with the ultimate goal of doing something very simple, which is being able to serve our customer anywhere they want to be for any travel needs they want. More countries, more products, more places,” he told USA Today.
More countries, more products, more places—it’s the American way, something Donald Trump would be proud to hear, and it speaks to the gluttony of American businesses where expansion, regardless of whether smart or strategic, is raison d’être.
By no means is Hilton the only guilty party. All hotel companies are culpable. But how can you blame them? It’s an arms race: eat or be eaten.
Is there, then, a solution? I’m not suggesting to thwart the building of new hotels. But it needs to be done at smarter pace, not a jolt, in a manner that doesn’t upset the current good times for the industry. As it stands now, 2015 may go down as a watershed year, because the future, based on the data, looks, at best, nebulous.
The hotel industry could do well to take a cue from the current state of oil. When there is too much, and not enough demand to guzzle it up, then you get into trouble.
Branded hotel companies need to work smarter with owners and developers to not upset the hotel market. Because what’s good for one, may not be good for the other.
This article originally appears on Hotelmanagement