Hospitality trends

Observations from the annual Phoenix, AZ Hospitality Sector Roundtable

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We surveyed hospitality sector leaders in Phoenix, Arizona, and invited these individuals to a roundtable on 3 November 2016 to discuss the survey results and industry trends. Our survey and discussions focused on the economy, transactions, capital markets, brands, technology, millennials and the industry’s focus on trends affecting the broader US hotel market. The results of the survey are below.

The economy - More than half of the survey participants (56%) believe we are one year from the peak of the cycle, while 22% believe we are at the peak and 22% believe the peak has past. Major concerns include high supply and property taxes. The general consensus was that while the market is seen slowing down in primary markets, there are still pockets with strong fundamentals in secondary markets, including Phoenix.

Transactions - Survey respondents feel confident that 2017 will be better than 2016 for transactions, with 22% saying they plan to acquire, compared with only 11% in 2016 whose strategy was to acquire. Market participants commented that owners have been selling properties as RevPAR growth accelerated between 2015 and 2016. As RevPAR continues to grow in certain southwestern and western markets, owners are more willing to develop and acquire additional properties.

EY Investment strategy in 2016 and 2017

Capital markets - Market participants expressed little change in their strategy for financing hotel transactions during the upcoming six months. Given that most respondents believed that the market is at or near the top of the cycle, it is not surprising that we have seen a slight uptick in deals planned using 50% debt and 50% equity compared with 70% debt and 30% equity during the past six months.

Brands - The primary customer focus in the hospitality industry are the millennial and Gen X segments, as further reflected in the survey results. According to research performed by The Center for Generational Kinetics, a consulting firm focusing on issues of millennial consumers, millennials are on pace to outspend baby boomers on hotels by 2017, with expectations that millennials will dominate the purchases in the travel industry by 2020.

As brands compete for revenue from this customer class, it is essential to tailor development toward the details millennials value: customized experiences, digital convenience and attention to design.

Technology - None of the respondents felt that the industry has taken all of the necessary steps to protect customer data. Cybersecurity experts believe that even the best-funded and most-prepared companies are at risk of a breach, and therefore, post-breach protocol is an ever-expanding area of focus. Market participants emphasized the need for establishing post-breach protocol in advance of any problems.

EY Focus of technology investments

Industry focus - As we come full circle from the lodging cycle, 74% of the survey respondents indicated that secondary markets are most ripe for development. Significantly ahead of primary and destination resorts, this shows where development will continue into 2017.

The majority of respondents believed that the strategy to attract the millennial population should be focused on both technology and property design elements, including both guest and common spaces. Frequently, technology translates to social media, involving online interaction and the sharing of stories and experiences. In exchange for more spacious common areas, millennial-focused hotels may downsize guest rooms, recognizing that millennials value social interaction more than time spent in the guest room.