Bob Habeeb, president and chief executive officer of First Hospitality Group in Rosemont, IL.

CHICAGO—First Hospitality Group, Inc. is a Rosemont, IL-based hotel management, acquisition and development company that has been developing, marketing and managing hotel properties across the Midwest since 1985. GlobeSt.com sat down with FHG's president and chief executive officer Bob Habeeb to discuss Midwest hospitality market trends—including where he sees RevPAR headed, the emergence of the hybrid service model, what Trump's presidency might mean for the industry, and what is on tap for the rest of 2017 and beyond.

Q: Talk a little bit, if you will, about the big picture. Where is the Midwest hotel marketplace today relative to this time last year?

A: Well this time last year I was talking about supply overtaking demand as a question of when, not if. I don't always get it right, but that general idea seems to have held true. It's worth noting, however, while that general trend line has continued, the positive momentum in some markets has, to some extent anyway, delayed the inevitable. Demand held up better than I anticipated in the latter part of 2016, and that pattern has continued so far in the first quarter of 2017. As a result, markets around the Midwest have been able to absorb some of the new supply that continues to come online.

Q: So is it fair to say that the strength in certain markets is delaying what you see as that inevitable supply-and-demand pivot point? 

A: Absolutely. I think strong leisure demand in particular has been the key to keeping the good times rolling a while longer. Certainly in my home market here in Chicago, leisure demand has continued to offset the impact of a significant number of new hotel properties. Chicago actually broke some records last year, hosting what turned out to be a record number of visitors during most of 2016. Leisure combined with strong group numbers helped to boost demand by 2.2% over that time, and Chicago actually saw record-setting leisure demand in each of the first three quarters in 2016. 

Q: It sounds like your broad conclusions haven't changed, however. Do you still expect demand to level off in 2017?

A: I do. And even more significant than demand leveling off is the fact that new supply continues to pour in—with more in the pipeline. The CBRE's Hotel Horizons forecast report released last December projected that average daily room rates will plateau, and I think that may even be a little bit too optimistic. It wouldn't surprise me to see rates drop some, especially later in the year. That said, I think it's a great sign that, in those markets where we have seen some more sluggish demand, hotel owners and operators have shown no signs of overreacting by cutting rates. I always worry about precipitous rate drops—I see it as the “unforced error” that so often happens when the market starts to get shaky. If rates go down faster than demand, it can exacerbate already significant structural issues. The real test will come when belts get tighter later this year and certainly into 2018. The degree to which we will be able to maintain rate integrity as demand softens could have a real impact on the depth and severity of the impact of the coming slowdown.

Q: And if your thoughts about 2017 and 2018 play out as expected, presumably that will have an impact on RevPAR? 

A: RevPAR will definitely be dipping as supply overtakes demand. I think a reasonable projection would be a RevPAR decline of something like five or six percent over the next 12 to 24 months. In 2017 specifically, I think a three to four percent dip in RevPAR numbers would be a good forecast.

Tomorrow: Habeeb talks more about the overall trends in the Midwest, the impact of millennials, and how political developments may influence the hospitality market.