There has been a lot of chatter recently about the possibility of a recession.
Yet what exactly does that mean — and what would a potential downturn look like?
A recession is defined as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months,” according to the National Bureau of Economic Research.
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It’s also ultimately inevitable during the course of the normal economic cycle, said Mark Hamrick, senior economic analyst at Bankrate.
“It should not be shocking that they occur,” he said. “It is usually the timing, the cause and the depth and duration of them that catch people by surprise.”
The risk of a recession
Economists are watching the economy closely and many are boosting their odds of a recession occurring in the near term. Citigroup, assessing global economic growth over the next 18 months, sees a 50% probability of a global recession happening, while Goldman Sachs has put the odds of a recession for the U.S. in the next year at 30%.
However, not everyone is convinced a recession will happen.
UBS, for example, has a base case forecast of “no recession.” Mark Zandi, chief economist at Moody’s Analytics, also thinks as things stand now, a recession is unlikely.
“The economy is slowing and it will be uncomfortable over the next 12 to 24 months, but I think we will make our way through it without a recession,” he said.
Of course, something could happen to change that projection.
“We are very vulnerable to anything else that could go wrong because things are so fragile,” Zandi explained.
‘The economy comes to a standstill’
Still, Zandi’s current prediction still means some economic pain ahead. “The economy comes to a standstill, meaning months where we are getting little job growth or negative job growth,” he said.
Unemployment would start to notch higher, perhaps hitting 4% or 4.5% and inflation, while moderating, will still be high, he said.
He doesn’t see stock prices going anywhere and housing values remaining, at best, flat or even declining in some markets.
“For the average American, it is not just going to feel great,” he said.
What happens during different types of recessions
Jim Young | Bloomberg | Getty Images
The duration and depth of recessions are characterized by shapes.
For instance, a V-shaped recovery is quick, with a sharp decline to a bottom followed by a dramatic rise. In a U-shaped recovery, on the other hand, the economy spends longer at the bottom and then gradually rebounds.
A W-recovery is when the economy passes through a recession and into recovery and then immediately enters another recession, and K-shaped means some parts of the economy recover more quickly than others.
What a ‘typical’ recession looks like
A post-World War II typical recession lasts about six to 12 months, although some were longer and one was shorter, Zandi said.
The most recent recession occurred in 2020 and was brief — only two months long. The longest recession occurring after 1948, the Great Recession, spanned 18 months, beginning December 2007 and ending June 2009.
In a garden variety recession, the economy typically loses 3 million to 4 million jobs, and unemployment can get as high as 6%, Zandi said. The stock market may fall another 5% to 10% and national house prices decline about 5% to 10%, he said.
That doesn’t necessarily mean that’s what will occur if the economy does fall into recession. Right now, the fundamentals of the economy are good, Zandi said.
“There is a good chance [if] we do suffer a recession, [that] it will be less severe than a typical one,” he predicted.
‘Prepare for the possibility’ of a recession
Whether a recession happens or not, you should be ready just in case.
“I counsel people to prepare for the possibility, to pay down debt, to save money, to consider deferring large purchases,” said Hamrick.
He anticipates that Bankrate’s Second-Quarter Economic Indicator survey will put chances of a recession in the next 12-18 months higher than the 1-in-3 odds in the first-quarter survey.
Still, that doesn’t mean the worst-case scenario.
“If there is a downturn here, I think that there is a possibility that it could be relatively short and shallow,” Hamrick said. “It need not be ruinous.”
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Steel mill owners in parts of China are in a bad mood, Beijing-based commodities consultant Simon Wu said.
Steel inventories are slowly piling up in the warehouses of the country’s biggest steelmaking hub, the northeastern city of Tangshan, as well as in the provinces of Jiangsu and Shandong, mill owners told Wu, a senior consultant at Wood Mackenzie.
Demand for steel is falling amid pandemic lockdowns and crippled construction activity, they said.
“There’s negative energy all round. The steel industry is just not making any profit,” Wu said.
A lot of steel — a key raw material in the manufacturing powerhouse — is sitting idle around the country amid a stop-and-start economy which is forcing down demand and prices.
Prices of both steel and its main ingredient iron ore were volatile during the Shanghai lockdown but headed on a downward trajectory earlier this month.
Weak demand for steel, a bellwether of China’s economy, also reflected the country’s broader slowdown, though recent data pointed to some improvement as industrial production rose slightly by 0.7% in May from a year ago.
Crucially, China’s steelmaking industry — the biggest in the world — hosts extensive supply chains that stretch from Chinese blast furnaces to overseas iron ore mines in Australia and Brazil, the biggest suppliers of iron ore to China.
Because of that, any jitters within China can unravel an extensive network of supply chains, potentially heaping further pressures on existing global disruptions.
A worker cutting steel pipes near a coal-powered power station in Zhangjiakou, China, on Nov. 12, 2021. The country’s biggest consumers of steel and its economic growth engines — such as property construction and infrastructure development — have gone quiet, according to one analyst.
Greg Baker | AFP | Getty Images
According to the China Iron and Steel Association, national daily outputs of intermediary steel products such as crude steel and pig iron as well as finished goods had been rising over the month of May by between about 1% and 3%. In contrast, demand, while still active, had fallen.
China’s consumption of crude steel, for instance, fell 14% in May compared with last year, S&P Global Commodity Insights iron ore lead Niki Wang said, citing in-house analyses.
“The year-on-year decline in steel demand was much greater than that of crude steel production. In that case, steel mills are indeed struggling (with the pressure on steel prices),” she said.
That period coincided with China’s biggest citywide pandemic lockdown yet in Shanghai.
Consequently, inventory levels are 12% higher compared with last year and may take nearly two months to fall to the median levels of the past five years, assuming steel demand roars back to life, said Richard Lu, steel research analyst at CRU Group.
The Chinese market is also competing with a proliferation of cheaper Russian semi-finished steel billets, said Paul Lim, lead analyst of Asia ferrous raw materials and steel at Fastmarkets Asia.
There had been signs of life for domestic steel consumption after China’s exit from lockdowns in early June, but the ‘stop-start’ disruptions caused by a relapse into scattered lockdowns [have] been an unwelcome blow to the country’s well-intended economic recovery.
Atilla Widnell
managing director at Navigate Commodities
As outbreaks gripped the nation, the country’s biggest consumers of steels as well as the Chinese economy’s growth engines such as property construction and infrastructure development have gone quiet, said Navigate Commodities managing director Atilla Widnell.
That’s because “there is simply no one to work at the sites,” he added, pointing out the industry was taken aback by the return of lockdowns.
After a much-awaited opening of Shanghai in early June after new cases were recorded for both Beijing and Shanghai, China started re-imposing some restrictions.
Last week, new data from China’s National Bureau of Statistics showed property investment for the first five months of the year declined 4% from a year earlier, increasing from the 2.7% drop between January and April.
Home sales by volume fell 34.5% on year in the first five months of 2022.
“There had been signs of life for domestic steel consumption after China’s exit from lockdowns in early June, but the ‘stop-start’ disruptions caused by a relapse into scattered lockdowns [have] been an unwelcome blow to the country’s well-intended economic recovery,” Widnell said.
Can’t just shut down blast furnaces
Even though steel prices have fallen and eroded steelmaking profitability, steel mill owners have continued production, with many using iron ore of lower quality to produce smaller volumes.
Chinese blast furnaces are now operating close to full capacity, at more than 90% — the highest rate in 13 months — despite thinner profits, analysts said.
Lu said some mills suffered “largely negative margins” over April and May.
Pricing data shows prices of popular steel products such as rebar and hot-rolled coil used for building homes have fallen by up to nearly 30% after peaking around May last year following an industrial revival to kickstart the economy.
Shutting down blast furnaces can be inefficient, as large reactors used for turning iron ore into liquid steel need to run continuously.
Once they’re shut down, it takes a long time — up to six months — to restart operations.
“So, Chinese operators are keeping their blast furnaces ‘hot’ by utilizing lower grade ores to voluntarily reduce yields in the hope that they can ramp up swiftly and respond to recovering steel demand as and when temporary lockdowns are lifted,” Widnell said.
“We believe that these operators are also producing larger quantities of Semi Finished Steel products so as not to crush finished Steel prices with inflated inventories.”
Wood Mackenzie’s Wu said another reason producers soldier on is so they can hit their annual allowed output targets before Beijing reduces them next year as part of an effort to meet its emissions targets by 2030 and 2060.
“Each year’s production is defined by last year’s output. So it is to producers’ advantage to produce the maximum amount of steel each year as cuts will be applied to that year’s output,” Wu said.
Return of the slump?
Steel demand and prices slumped between 2012 and 2016 after the Chinese economy slowed heavily, causing commodity prices to fall.
For many miners servicing China, such as those in Australia, it was the end of the so-called mining boom.
In 2015 alone, China’s major steel firms suffered losses of more than 50 billion yuan.
For starters, this downturn is not 2015, Wu said, and steel producers have learned to be resilient against volatility.
“So, they will keep producing steel because they have to pay wages and maintain other cash flows. Many producers can probably last two years without making money. Many people on the outside [of China] don’t understand this resilience,” he said.
CRU’s Lu said while some mills are contemplating slowing production, inventory levels are “far far away from the panic levels” and storage capacity is not yet a serious issue.
There are, however, early signs that the industry is starting to adjust to these adverse conditions.
Recently, there were rumors that the Jiangsu provincial government had mandated local steel mills to cut production by about 3.32 million tonnes for the rest of the year.
It’s not clear if that is an effort to curb excessive steel inventory or part of wider adherence to cutting production and emissions.
“I think China is fully aware of the weaker domestic steel demand this year, and will use executive power to force mills to cut production just like it did before,” said Alex Reynolds, an analyst at commodity and energy price agency Argus Media.
“If steel prices continue to fall sharply with losses extending, the Chinese government may set exact numbers for production cuts – kind of like what the OPEC did when Covid was at its height in 2020-2021.”
S&P’s Wang agreed, adding that stimulus from Beijing’s looser monetary policies should also play a part in reviving steel demand down the track.
Meanwhile, others in the steelmaking supply chain, such as Australian and Brazilian iron ore miners, need not worry for now as lower output from the mines have offset lower demand, she said.
But miners are nonetheless concerned about bearish conditions in China, Wang added.
“The high pig iron production means demand for iron ore is solid. The iron ore inventory at China’s major ports has been trending down since the Chinese Lunar New Year holidays,” she said.
Iron ore prices have hovered between $130 and $150 a tonne in the past two months, compared with prices of as low as $30 to $40 a tonne during the 2012-2016 slump.
CNBC’s Jim Cramer said that Tuesday’s market gains need to come down in order for the Federal Reserve to beat inflation as soon as possible.
“Right now, the best outcome would be for the averages to come down quickly, so [Fed Chair Jay Powell] can get it over with,” he said.
“Powell had better hope this run won’t last, or else those beach house prices, new construction jobs, Lennar homes, processed food stocks and oil prices won’t be going down and staying down anytime soon,” he added, referring to the homebuilder’s warning in its latest earnings call that buyers have pushed back against current housing prices with sales slowing in some markets.
Stocks rose on Tuesday after the market was closed on Monday due to the Juneteenth holiday. While the rally was a welcome reprieve for investors after last week’s declines, many fear the comeback will be short-lived as recession fears loom over Wall Street.
Cramer said that while he’s normally in favor of higher stock prices, the Fed needs the market to decline for inflation to also come down. The reason, he said, is that a downturned market will curb spending and keep people in the labor market.
“In recent years, bountiful gains in the stock market have allowed the winners to spend like crazy,” he said.
“If Powell can get this market to go down and stay down, repealing much of those gains, then the rich are less likely to spend aggressively and a lot of people are more likely to remain in the workforce when they might otherwise have retired,” he added.
Markets have been on a wild ride recently, swinging between gains and losses. However, the brutal selling has meant the S&P 500 is still in a bear market.
When asked whether markets have hit a bottom, Wall Street veteran Ed Yardeni said he doesn’t think “we’re gonna climb out of this thing very quickly, not in a fundamental sense.”
“I think investors have learned this year — ‘don’t fight the Fed,'” he told CNBC’s “Street Signs Asia” on Monday. The mantra refers to the idea that investors should align their investments with, rather than against, the U.S. Federal Reserve’s monetary policies.
What changed dramatically this year is ‘don’t fight the Fed’ now means don’t fight the Fed when it’s fighting inflation.
Ed Yardeni
president, Yardeni Research
“For many years, the idea of don’t fight the Fed was if the Fed was going to be easy [on monetary policy.] You want to be long equities,” said Yardeni, president of consultancy Yardeni Research. “But what changed dramatically this year is ‘don’t fight the Fed’ now means don’t fight the Fed when it’s fighting inflation. And that means that that’s not a good environment for equities on a short-term basis.”
‘Too late to panic’
With inflation soaring to new highs this year, the Fed raised interest rates by 75 basis points last week — its biggest since 1994 — and signaled continued tightening ahead. Fed Chair Jerome Powell said another hike of 50 or 75 basis points at the next meeting in July is likely.
However, the economy now faces the risk of stagflation as economic growth tails off and prices continue to rise.
Wall Street has tumbled in response to the Fed’s tightening and rapidly rising inflation. The S&P 500 last week posted its 10th down week in the last 11, and is now well into a bear market. On Thursday, all 11 of its sectors closed more than 10% below their recent highs. The Dow Jones Industrial Average fell below 30,000 for the first time since January 2021 this past week.
Yardeni said it “isn’t going to be over” till there are definitive signs that inflation, brought on by soaring food and energy prices, has peaked. Market watchers have also blamed rising prices on the Fed’s fiscal overstimulation of the economy amid the Covid-19 pandemic.
“We’ve got to see a peak in inflation before the market will be substantially higher,” he said, adding that point could come next year.
Still, Yardeni believes that markets “are kind of at an exhaustion stage” in the selling.
“At this point, it’s a little too late to panic. I think long-term investors are going to find that there’s some great opportunities here,” he told CNBC.
A recession that will ‘hurt the rich’
Rumblings of the possibility of a recession have been getting louder, as doubts surface about the Fed’s ability to achieve a soft landing. A bear market often portends — but doesn’t cause — a recession.
“This will be the first recession that hurts the rich probably for a pretty long while, more than it hurts the ordinary person on the street,” said Mark Jolley, global strategist at CCB International Securities.
“If you look at what’s happened to bond and equity prices and look at the combined decline in bond and equity prices, we are on track to have the worst year already of wealth destruction since 1938,” he told CNBC’s “Squawk Box Asia” on Monday.
As interest rates go higher, the value of people’s assets bought with borrowed money will fall, Jolley said, suggesting that mortgages are at risk.
“Anything in the economy that is leveraged and long, which is basically private equity, your collateral has gone down 20%,” he said. “Imagine what would happen to the banking system in any economy if your house prices fell by 20%.”
#GTAHomeHunt is a weekly series from the Star that gets into the details of real estate listings in Toronto and the Greater Toronto Area. Have a tip? Email us at social@torstar.ca.
Listed price: $849,900
Neighbourhood: Alderwood
X-factor: Sitting in southern Etobicoke, the home at 155 Gamma St. is just a ten minute drive from Lake Ontario and 15 minutes from downtown.
The three-bedroom bungalow has a detached garage, three parking spaces and one bathroom. One bedroom sits in a crawl space in the basement and another is perched in the home’s loft. A third sits on the home’s main floor.
A large window lets natural light flood the main living space.
A wraparound porch looks into a private backyard with a wooden fence. A partially-renovated kitchen features stainless-steel appliances, a double-sink and ample counter space. Dark wooden cupboards match the home’s hardwood floors.
The unit is a short walk from the Etobicoke Valley park and the Sherway Gardens mall. Several public schools and a Farm Boy grocery store, and Lakeshore Boulevard West are also within walking distance.
The 110 bus provides easy access to the Long Branch GO train station and the TTC subway line 2. The home is a 15-minute drive from downtown Toronto, and provides easy access to Highway 427 and the Gardiner Expressway.
We asked real estate expert realtor Othneil Litchmore for more insight on the property.
Why is it priced this way?
The home is listed at half the average selling price of other houses in its neighbourhood, which was about $1.69 million last quarter, according to the Toronto Regional Real Estate Board.
“I think it’s a decent deal,” Litchmore said. “The price point is pretty good for Toronto, especially for somebody that wants to live in this part of the city.”
Litchmore said he thinks the home will sell for about its listed price. If the home sold for the listed price, he said it could be the least expensive sale the neighbourhood sees all year.
He added the home is considerably small for a detached home with a backyard in Etobicoke. The house includes a crawl space instead of a basement, and a loft instead of a second storey.
“It’s just not a very big space, so [the price] makes sense,” Litchmore said.
The home is also close to industrial and commercial areas, which Litchmore said contributes to the home’s price tag.
Any other tips for those looking at places like this?
Lower-priced homes near downtown are often smaller or bungalows, Litchmore said. He added homes nearby were usually larger, and much more expensive. Residents looking for detached places near the city on a lower budget will often have to compromise on space.
Litchmore said looking for residents who wanted to be close to downtown would be “the key” to finding new owners.
He added the home would be a good option for a couple or small family.
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Fixed asset investment data for the first five months of 2022 showed real estate investment declined at a greater scale than it did during the first four months of the year. Pictured here on May 16 is a development in Huai’an City in Jiangsu province in east China.
CFOTO | Future Publishing | Getty Images
BEIJING — A measure of risk levels for debt in Asia has surpassed its 2009 financial crisis high, thanks to a surge in downgrades of Chinese property developers since late last year, ratings agency Moody’s said Wednesday.
Among the relatively risky category of Asian high-yield companies outside Japan that are covered by Moody’s, the share with the most speculative ratings of “B3 negative” or lower has nearly doubled from last year — to a record high of 30.5% as of May, the firm said.
That’s higher than the 27.3% share reached in May 2009, during the global financial crisis, the report said.
That year, only three Chinese property developers were part of that risky share, versus 24 in May 2022, Moody’s said.
It’s not clear whether the new record indicates a financial crisis is imminent.
High-yield bonds are already riskier than products deemed “investment grade,” and offer higher return but greater risk. “B3 negative” is the lowest rating for a category that denotes assets that are “speculative and are subject to high credit risk” in Moody’s system.
Spate of downgrades
Driving the new record high in risky ratings was a spate of downgrades on Chinese real estate developers as worries grew over their ability to repay debt.
Moody’s said it issued 91 downgrades for high-yield Chinese property developers in the last nine months.
That’s a record pace, the agency said, considering it issued only 56 downgrades for such companies in the 10 years ending December 2020.
Some Chinese developers’ bonds have received more than one downgrade, the report noted. Names on the Moody’s “B3 negative” or lower list include Evergrande, Greenland, Agile Group, Sunac, Logan, Kaisa and R&F. Evergrande entered the list in August, while several were added only in May.
“Our downgrade is a reflection of the current very tough operating environment for China property developers combined with a tight funding environment for all of them,” Kelly Chen, vice president and senior analyst at Moody’s Investors Service, said in a phone interview Thursday.
“We’ve all seen contracted sales have been quite weak, and we haven’t seen very significant rebound responding to the supportive policies,” she said, noting the effect would likely be seen in the second half of the year.
Financing challenges
The central Chinese government and local authorities have tried to support the property market in the last several months by cutting mortgage rates and making it easier for people to buy apartments in different cities.
“For the developer financing, I think the market knows that since the second half of last year the commercial banks turned fundamentally cautions on the sector, especially the private [non-state-owned] ones,” Hans Fan, deputy head of China and Hong Kong research at CLSA, said in a phone interview last week.
Some cautiousness remains, he said. “Year-to-date what we see is that the banks are lending more to the state-owned enterprises for M&A purposes,” he said. “That’s something encouraged.”
At a top-level government Politburo meeting in late April, Beijing called for the promotion of a stable and healthy real estate market and urged support for local governments in improving regional real estate conditions. Leaders emphasized that houses are for living in, not for speculation.
However, Chinese real estate developers also face a tough financing environment overseas.
“Companies rated B3N and lower have historically faced challenges issuing in the US dollar bond market,” Moody’s said in Wednesday’s report. “With credit conditions tighter today, the US dollar bond market has also remained relatively shut to Asian high-yield issuers.”
As a result, the agency said that rated high-yield issuance plunged 93% in the first five months of the year from a year ago to $1.2 billion.
More defaults expected
China’s massive real estate sector has come under pressure in the last two years as Beijing seeks to curb developers’ high reliance on debt for growth and a surge in house prices.
Many developers, notably Evergrande, have issued billions of dollars’ worth in U.S. dollar-denominated debt. Investors worried defaults would spill over to the rest of China’s economy, the second-largest in the world.
Evergrande defaulted in December. Several other Chinese real estate developers have also defaulted or missed interest payments.
Moody’s expects to see more China real estate developers defaulting this year, Moody’s Chen said. She said the agency covers more than 50 names in the industry, and more than half have a negative outlook or are on review for downgrade.
The firm estimates that real estate and related sectors account for 28% of China’s gross domestic product. On Tuesday, Moody’s cut its 2022 forecast for China’s GDP growth to 4.5% from 5.2%, based on the impact of Covid-19, the property market downturn and geopolitical risks.
Data released this week showed the real estate market remains subdued.
Real estate investment during the first five months of this year fell by 4% from the same period a year ago, despite growth overall in fixed asset investment, China’s National Bureau of Statistics said Wednesday.
Property prices across 70 Chinese cities remained muted in May, up 0.1% from a year ago, according to Goldman Sachs’ analysis of official data released Thursday.
In line with its commitment to making the average median earning family own their own homes in any part of the country, SuCasa is set to launch its accessible, ultra-modern properties on June 2022 at the De Icon Events Centre in East Legon, Accra.
The launch event will showcase SuCasa’s luxurious two, three and 4-bedroom units.
Speaking ahead of the launch, CEO of SuCasa Properties, Michael O’Grantson-Agyapong noted that there will be an exclusive discount offer for all prospective clients in attendance.
“If we indeed want to see our nations within the region shed the tag of ‘developing countries’ and to be part of the developed world at a rapid rate, this begins with the real estate industry, in my not-so-humble opinion. Nations are built. The onus lies on the private citizen to build and manage our nations with the support of the honorable men holding public offices, not the other way round.”
“SuCasa envisions to lead the way in the delivery of real estate services and projects in the real estate industry. It is our mission to bring to the table a classic approach with modern systems to curb the lack of access to homes in our society. To reward our prospective clients and many partners, we will be giving an exclusive discount offer to all in attendance” he added.
On his part, General Manager of SuCasa Properties, Abdul Rahman Shehab assured clients and prospective clients of free litigation and excellent service.
“We assure our clients of free litigation and convenience of service by conducting our due diligence. Also, we engage in strategic partnerships to ensure your comfort. Collaboration, accountability, sustainability, and ingenuity are our core values. We are looking forward to have you join the SuCasa O’Granston Community”, he concluded.
SuCasa Properties is a real estate company that provides all your realty services. SuCasa Properties design, build, sell, rent, renovate, offer consultancy and advisory services on litigation, and property management. It is the only real estate company that offers a 100% cash back guarantee and are the custodian of client satisfaction.
Source: Peacefmonline.com/Ghana
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Featured Video
Behind the automation boom coming to the hotel industry, from 24-hour check-in to texting for towels
Mathisworks | Digitalvision Vectors | Getty Images
For years, hotel operators have under-invested in technology, but persistent labor challenges are forcing a reckoning in the industry.
“The labor issue is a big driver for investments in technology,” said Mark Haley, a partner at Prism Hospitality Consulting, which specializes in hospitality technology and marketing. “You can’t hire enough people. … I would submit to you that to most hoteliers today, [labor] is a more profound and concerning issue than a pending economic slowdown.”
At the moment, hotel operators are reporting brisk bookings, even in the face of rising room rates. Thank leisure travelers. They seem so eager to get out and about that they aren’t flinching at the higher prices. Hotel revenue per available room, a key industry metric known as RevPAR, will likely top pre-pandemic levels this year, on a nominal basis, according to two industry forecasts.
The latest, released by STR and Tourism Economics at the NYU International Hospitality Industry Investment Conference this week, predicts that hotel occupancy will remain below 2019 totals but average daily rates will be higher by about $11 than the group’s prior forecast.
The outlook factors in the possibility of a recession, but doesn’t expect the economy’s slowdown to force the traveling public to alter their habits. And it anticipates that business travel will continue to ramp up heading into next year.
“It’s kind of a cold reality that even in a fairly deep recession, more often than not, 70-80% of the population isn’t seeing it. They’re still getting their regular paychecks and they’re still traveling,” Haley said.
Business travel has long been a key driver of hotel spending and its weakness continues to be felt. In April, the American Hotel & Lodging Association and Kalibri Labs projected that hotel business travel revenue will be 23% below pre-pandemic levels this year, which is a loss of about $20 billion from 2019. In 2020 and 2021 combined, the industry lost about $108 billion in business travel revenue, according the AHLA.
In May, PwC projected business traveler growth next year will help offset any softening from leisure demand. It anticipates average daily room rates would be up 16.9% in 2022 from the prior year, prompting a 28.1% climb in RevPAR from last year. Then, in 2023, higher occupancy and room rates will help RevPAR rise 6.6% year over year, which would be 114% of the 2019 level.
Skipping the front desk, texting for towels
As guests venture back to hotels they likely will notice some big changes, hotel operators say. Among them is a greater reliance on technology, which is often being used to help ease the impact of staff shortages.
More guests should be able to skip the front desk, and check into their rooms using a kiosk or app on their phone. Oracle and travel industry trade publication Skift conducted a survey of 633 hotel executives this spring and nearly all — some 96% — were investing in self-service technology at their hotels. And 62% said they expect contactless experiences will be the most widely adopted tech over the next three years.
Marco Manzie, founder and president of Paramount Hospitality Management, which operates five resort and hotel properties in Orlando, Florida, said he sees the investment in technology as a must because it has the power to lower his costs over time.
“When we look at the leanness of the future economy, it has most hoteliers and owners of hotels taking a step back and revisiting ways to improve their bottom line margins because they’ve been eroded from the inflation that we’ve been hit with,” Manzie said.
Inflation hasn’t been this brisk since December 1981. Surging food and energy costs pushed the consumer price index up 8.6% in May, the Bureau of Labor Statistics said on Friday. Hoteliers are seeing these costs ripple through their businesses, from the food sold in hotel restaurants to the fuel that heats and cools buildings to the salaries paid to staff.
Manzie said he is in the process of rolling out contactless check-in and kiosks for food and beverage orders at some of the properties he manages. Since it is still a work-in-progress, he has yet to reap the benefits of lower labor costs.
“I can tell you that we budgeted the end of the year for some labor cost reductions, anticipating savings,” he said.
Accelerated timelines
When the pandemic struck in early 2020, most large hotel chains had already been deploying contactless options for their guests. But Covid accelerated the adoption and now it’s the cost of entry, industry consultants said.
According to Alex Alt, senior vice president and general manager at Oracle Hospitality, some hotels were looking to make these changes within a one-to-three-year time frame. After Covid struck, the road map was accelerated to one to three months in many cases, he said.
“As hotels saw a decrease in hotel staff and an increase in customer safety and health expectations, there was a strong need for hotels of all sizes to automate the hospitality experience by empowering guests to manage their stay largely from their mobile devices,” Alt said, in an email interview.
Nitat Termmee | Moment | Getty Images
One reason is guests expect it. In their survey, Oracle and Skift also polled 5,266 consumers, and the vast majority (73%) said they are more likely to stay at a hotel with self-service options.
The responses suggested guests want the ability to order room service from their phone or text to have more towels sent up to their rooms. They also want to seamlessly connect to their personal streaming or gaming accounts with the in-room television without having to remember their passwords.
Also, consumers want the ability to “unbundle” hotel offerings and only pay for the services they use during their stay, Alt said. They are even willing to pay more for personalized choices such as selecting an exact room or floor, he said, likening it to options consumers have in booking airline tickets.
In the Oracle survey, 40% of hoteliers said the unbundling model is the future of the industry.
“This is a step-change from the way hotels recognize revenue today, so they need a more modern [enterprise resource planning] ERP system to be able to adapt to these changes,” Alt said.
He declined to provide specific forecasts for future spending but said hotels are making significant investments throughout the business.
The trouble is that some hotel technology systems are antiquated, especially at independent hotels. In an article published in Hospitalitynet, New York University professor Max Starkov said the hospitality industry can often spend less than 2.5% of net room revenue on IT, including staff and benefits.
Darin Yug, PwC U.S. hospitality and gaming consulting leader, also has seen a greater focus on updating back-office systems.
“There hadn’t been a lot of attention paid to the back office,” he said, adding that companies were having to play a bit of catch-up. But even this investment is also being inspired in part by labor needs, he said.
“The quest for talent is not only for people cleaning your rooms and hotels, but also running finance operations and it’s getting more and more difficult,” Yug said. “By putting better technology, better tools in their hands, it’s really about upgrading … the experience for their employees.”
Scott Strickland, the chief information officer at Wyndham Hotels & Resorts, said the small business owners that franchise Wyndham hotel brands like Wingate, Ramada and Days Inn, have the benefit of using one of two standardized property management systems it offers.
“We made the foundational investment [to standardize], which puts us way ahead of our competitors,” Strickland said. It also means that some of services more commonly associated with high-end hotels are available to its more economy-priced hotels brands.
“For us to be be able to do it at the economy hotel and to roll that out at scale is something we’re very proud of,” Strickland said. He added that it means a bus full of kids coming back from a soccer tournament can arrive at a Super 8 hotel and use self-service check-in to speed their way to their rooms, which helps build loyalty.
Wyndham’s franchisees can also opt into its reservation system, which routes customers to a centralized call center to book a room. Wyndham said the 4,000 hotels that use the system see a 15% or higher premium on rates than non-participating hotels. Also, hotel operators are able to focus on the guests at their hotel or other duties like cleaning rooms, without a distraction, Strickland said.
Don’t forget to tip the housekeeper
Still, Wyndham is looking for new ways to use tech to ease the labor crunch. It is piloting a cashless tipping system where guests are able to tip the housekeeping staff by scanning a QR code in the room with a phone. So far, Wyndham has seen an increase in tipping, Strickland said.
Bene, the provider of the cashless tipping platform, has said its clients see an average increase in staff compensation of $4.50 an hour, and a 30% increase in monthly staff retention.
Zhihao | Moment | Getty Images
Strickland said the system makes it easier for guests, who often don’t carry cash, to be able to tip.
Many hotels are also considering chatbots, machine learning, artificial intelligence, facial recognition and other ways to run properties more efficiently and safely with less staff. These technologies are particularly helpful in handling more mundane requests, which then allows staff to focus on more meaningful one-on-one interactions, said Oracle’s Alt.
“These types of strategic technologies will be critical as the hospitality industry is still facing a labor shortage as we head into the busy summer travel season,” he said.
‘Flexy Time’ and road trip apps
Sharan Pasricha, the founder and co-CEO of lifestyle hospitality company Ennismore, said he has used technology as a key point of differentiation in his business.
“The hotel industry runs on a very archaic technology stack,” said Pasricha, who explained that many hotels are only now switching over their property management systems to the cloud.
Pasricha’s approach has been to have in-house software developers and product engineers who can create bespoke applications. One of his focus areas was improving the booking system, where he drew inspiration from features in the e-commerce industry, which he sees as more innovative than the hotel industry.
“I couldn’t quite understand why we would accept a very traditional, boring, badly designed … cookie-cutter [third-party] booking engine, when we care so much about our physical experiences and everything in our hotels is so thoughtful and authentic and creative,” he said.
His efforts led to more bookings coming directly to the website of Hoxton, one of Ennismore’s boutique hotel brands. About 50% are direct, Pasricha said.
It also made it possible for the company to create Flexy Time, a feature that allows its guests to check in or out of a room 24 hours a day, rather than having to wait for a standardized time. Pasricha said the offering, which comes with no extra charge, means guests don’t have to “bum around the lobby for five hours” after arriving in town on a red-eye flight.
Flexy Time presents more of a logistical and operational challenge, but it has helped Hoxton stand out among other hotel brands. To make sure rooms are ready, it asks guests when they will arrive and depart when they book.
“Having the ability to control the technology allows you to have these iterations and innovations, which has for us, garnered a lot of loyalty with our guests,” he said.
Ennismore is in the process of expanding Flexy Time to its 14-brand portfolio, which includes the Scottish hotel Gleneagles, So/ and Mama Shelter, among others. The company is a joint venture with Accor, the French hospitality brand that owns the Fairmont and Sofitel hotel brands, among others.
Wyndham also looks for ways to stand out with its investments. Two weeks ago, it launched a road trip planning feature on its app that recommends routes and allows users to customize a trip itinerary. Also, ahead are investments it will make in electric vehicle charging stations, including a reservation system to book plug-in time, Strickland said.
Mobile apps are great for companies that want to build loyalty with their customers. The data companies can harvest allows them to better tailor future services and offers.
Although it’s too soon to say what impact inflation will have on the industry, the pandemic forced “a new level of appreciation” for modern systems, according to Alt.
“While the pace of innovation may slow, hotels know there is no turning back on these new consumer demands and they must be able to adapt with the help of the right technology,” he said.
Jake and Stephanie Murphy are moving into a new single-family rental home built by American Homes 4 Rent.
Diana Olick | CNBC Real Estate Correspondent
As demand for single-family rental homes surges, big landlords are jumping into the homebuilding business to shore up falling supplies.
The push comes as more Americans have the flexibility to work from anywhere and are looking for larger spaces with outdoor areas.
“This market is very undersupplied. There are not enough quality homes for the number of American families,” said David Singelyn, CEO of American Homes 4 Rent, which has built more than 100 rental-only communities in the last five years.
According to the National Association of Home Builders, there were 13,000 new single-family homes started as rentals in the first quarter of this year, up 63% from a year ago. Homes-built-for-rent still represent just 5% of the home building market, but that’s up from the 2.7% historical average, according to the association.
In Mooresville, North Carolina – about 30 miles north of Charlotte – American Homes 4 Rent’s newest development includes more than 220 rental homes with access to amenities including a pool and fitness centers. Landscaping and maintenance is included in the rent.
Jake and Stephanie Murphy, who’ve been able to work remotely since the pandemic, are among those who relocated to the community after selling their home in California. They could afford to buy, but opted to rent a four-bedroom home for their family for $2,400 a month.
“We’re just not sure if the housing prices will really stay where they are currently. So we didn’t want to buy at the peak and then have them go down in a couple of years,” said Stephanie Murphy, who is 29.
The Murphys also said they liked the flexibility of renting as they learn about a new area.
The number of rentals is now falling slightly, as some smaller landlords sell their homes at the top of this pricey market. But Singelyn expects to keep building homes for rent over the next few years based on the strengthening demand he said he’s seeing.
“How many inquiries are we getting? How many showings? How many applications are we getting on every available home? It’s two to three times greater today than it was two years ago before the pandemic,” Singelyn said.
Other companies investing in the build-for-rent market include Lennar, DR Horton, Taylor Morrison and Toll Brothers. Invitation Homes, the largest publicly traded landlord, last year went into a joint venture with homebuilder Pulte Homes to build more rental homes.
Investment in single-family rentals – both buying older homes and building new ones – has grown dramatically. The sector saw investments of about $3 billion in 2020, according to John Burns Real Estate Consulting. In 2021, the figure surged to $30 billion. It’s expected to reach $50 billion this year as larger institutional investors, homebuilders, and landlord rush into the market.
Like most big landlords, American Homes 4 Rent got into the business during the Great Recession when millions of homes went into foreclosure. The company snapped up cheap, distressed properties, often on the auction block, and turned them into lucrative rentals.
There were 11.6 million single-family rental households in 2006, at the last housing peak. That figure rose to 15.5 million in 2014 after the housing market crashed, according to John Burns Real Estate Consulting.
But the growing demand and tightening supply also mean homes-for-rent are getting less affordable. Nationwide, single-family rents are up more than 13% at from a year ago, according to CoreLogic.
“A shortage of single-family properties available for rent has plagued the market, pushing rents up at record-level rates,” said Molly Boesel, principal economist at CoreLogic. She noted the the number of single-family rental properties listed early this year was well below pre-pandemic levels.
Back in Mooresville, North Carolina the Murphys are watching how the market plays out. But Jake Murphy said he doesn’t believe homeownership is part of the American Dream, and is enjoying renting for now.
“I’m excited because you look around the neighborhood, there’s like Texas license plates and New York, and then we have California,” he said.
Check out the companies making headlines before the bell:
DocuSign (DOCU) – The electronic-signature technology company’s stock plunged 26.1% in the premarket after its quarterly profit and revenue fell short of Wall Street forecasts. DocuSign had previously warned that a return to post-Covid working conditions could cut into its business.
Vail Resorts (MTN) – Vail Resorts rallied 6.7% in premarket trading after the resort operator posted better-than-expected quarterly results. Vail benefited from an easing of Covid-related restrictions and noted successful efforts to attract visitors outside of its peak skiing season.
Stitch Fix (SFIX) – Stitch Fix shares slumped 15.4% in premarket action after the online clothing styler posted a wider than expected quarterly loss and gave weaker than expected revenue guidance. Stitch Fix also said it would cut 330 jobs, about 4% of its total workforce.
Rent The Runway (RENT) – The fashion rental company posted a smaller-than-expected quarterly loss while its revenue came in above Wall Street forecasts. Sales doubled from a year earlier and Rent The Runway also issued an upbeat current-quarter revenue forecast. Shares jumped 8.2% in the premarket.
Illumina (ILMN) – The maker of gene-based therapies saw its shares decline 4.2% in the premarket after announcing the departure of Chief Financial Officer Sam Samad, who is taking the CFO role at Quest Diagnostics (DGX).
Netflix (NFLX) – Netflix slid 4.7% in premarket trading after Goldman Sachs downgraded the stock to “sell” from “neutral” and cut the price target to $186 per share from $265. Goldman said it was focusing on a number of factors, including an increased focus on profitability and lower investor tolerance for long-term investments as Netflix and other web-based businesses mature. In the same report, Goldman also cut to “sell” from “neutral” video game company Roblox (RBLX), down 4.7% in the premarket, and eBay (EBAY), down 3.6%.
Angi (ANGI) – The home services company reported a 24% jump in May revenue, compared with a year earlier, even as service requests fell 7%. Separately, the company announced the departure of Chief Financial Officer Jeff Pederson.
CME Group (CME) – The exchange operator’s stock gained 2.3% in the premarket after Atlantic Equities upgraded it to “overweight” from “neutral.” The firm said CME has the strongest fundamental backdrop among U.S.-based exchanges and that a recent drop in the stock provides an attractive entry point.
Kontoor Brands (KTB) – Goldman Sachs downgraded the stock to “neutral” from “buy,” noting that increasing cost pressures have been weighing on results and earnings growth for the parent of the Lee and Wrangler apparel brands. Kontoor Brands fell 1% in the premarket.