INTELLIGENCEfeature from the FALL 2023 issue of STAY Magazine
Less volatile hotel performance likely will present an upside in hotel values
By Laura Baxter, director of hospitality analytics and Colin B. Sherman, director of hospitality market analytics
ENERGY PRICES HAVE LONG BEEN A LEADING INDICATOR OF HOTEL PERFORMANCE IN MAJOR OIL MARKETS IN NORTH AMERICA. During an oil boom, prices go up, and more production follows. This reverberates through the economy, from elevated corporate hotel demand to more large industry conferences, and positively impacts the local finance and real estate sectors.
The severe impact that the 2014 oil price crash had on all aspects of the economy, including hotel performance, made it painfully obvious that diversification was needed. Although momentum is accelerating to de-risk oil-dependent economies, a firm relationship exists between oil prices and hotel performance in markets such as Houston and Calgary. Therefore, the steady short and medium-term outlook for the sector should support growth in the hotel sector.
The longer-term relationship is less straightforward. Economies closely tied to the oil and gas sector are focused on diversifying to become less reliant on oil. This is most urgent in Calgary, with the primary and utilities sector contributing 25 per cent to local GDP. Meanwhile, the contribution in Houston is lower at 10 per cent, with the wholesale and retail sector being used as a lever to differentiate.
As the process continues, there will be an inflection point at which the relationship between the price of oil and revenue per available room, or RevPAR, weakens in each city. Thankfully, a more diverse economy should also lead to less volatility in the economy overall and, ultimately, hotel performance.
There are reasons to believe that hotel performance and oil prices are already starting to decouple. When examining economic data for Houston and Calgary, there are clear signs of diversification. According to Oxford Economics, both cities have GDP projections through 2027 that exceed the national average. Notably, there is no GDP contraction in the forecast for each city, and both are expected to be the fastest-growing metros in their respective countries. Growth is not only expected to be driven by the relatively strong medium-term outlook for the energy sector but in other sectors, too, such as professional and business services.
De-risking the city’s economies is also expected to be supported by growth in sectors that benefit from population growth, such as retail and government. Both Houston and Calgary have benefitted from strong in-migration spurred by highly ranked post-secondary education offerings, job growth and relative housing affordability compared to other major urban centres. The fast-growing, young, and educated populations will also serve as a strong foundation for further diversification.
The changes taking place from an economic perspective will trickle through to the hotel sector. In each city, there are also market-specific reasons that hotel performance is starting to decouple from the outlook in the oil sector.
Houston’s strong economic base in energy has provided a foundation for growth in other industry sectors, such as healthcare, and aerospace, while maintaining its reputation as a major business hub. All sectors have helped the city’s hotels to exceed pre-pandemic norms, lifting RevPAR by 5 per cent. Across the city’s different regions, the strongest performance has been outside of Houston’s “energy corridor," where the highest concentration of oil and gas businesses are located. Houston’s central business district (CBD), Galleria/Greenway Plaza, and medical centre boast the fastest improvement in performance indicators and strength in these areas is driven by other parts of its economy. Hotels in Houston’s (CBD) are benefitting from its centralized location and the area’s recent uptick in hosting conferences. The medical centre area of the city is also benefitting from a combination of leisure and growing medical and business travel. Meanwhile, the Galleria area has seen an influx of new businesses and international tourists drawn to its upscale retail and entertainment offerings.
Calgary has had an even stronger rebound from the pandemic, with RevPAR up 30 per cent ahead of pre-pandemic levels. Like Houston, in the different areas of the city, hotels that are not reliant on demand generated from the energy sector are outperforming those that are, such as hotels downtown, by 10 percentage points. Notably, success at the airport has been driven by strong leisure demand as it serves as a jumping-off point for travel to the Rocky Mountains. Growth is expected to continue as the Alberta government and WestJet have committed to making the airport a major hub and introducing more international routes.
The economy in both cities is still broadly dependent on the energy sector. However, the current trajectory of change is a positive one and is showing up in economic data. This will ultimately lead to less of a correlation between oil prices and hotel performance. As the momentum continues toward diversification, there will be less economic volatility and ultimately present upside opportunities in hotel performance and values.
STR provides premium data benchmarking, analytics and marketplace insights for the global hospitality industry. Founded in 1985, STR maintains a presence in 15 countries.
The Hotel Association of Canada (HAC) has announced the resignation of Susie Grynol from her position as president and CEO, effective June 3rd, 2024
To commemorate International Women’s Day 2024, Choice Hotels Canada presents the remarkable journeys of four distinguished women leaders within the Canadian hotel sector. Their stories of resilience, innovation, and…
Atlific Hotels has appointed Christine Kennedy to chief executive officer.
Marriott International has appointed Susie Grynol and Keri Robinson to its Canadian senior leadership team.