Democratization of Global Travel – It’s a Small World After All
This is Part 9 of a multipart series, please see past posts for context – Part 1, 2, 3, 4, 5, 6, 7, and 8. Visit JharrisPHD.com for all past articles, biographical information, and photography portfolio.
Rise of the Global Citizen and Global Traveler
With the proliferation of air travel, moving around the globe has never been easier, or cheaper. In fact, the average price of a domestic ticket in the US has fallen 40 to 50% since the ‘60s and ‘70s in real dollar terms. A natural result of deregulation, increased competition (and the rise of low-cost carries), improved airplane technology, and increased load factors (i.e. a full flight can better cover costs than a partially empty one). The price declines on trans-oceanic travel can be even more dramatic, especially when “sale” fares can make ocean crossings as low as sub-$500 round-trip. The result has been a steady, yet fast climb in the number of people traveling and the distance they travel each year. According to the World Tourism Organization, international arrivals reached 1.33 billion in 2017; this was only approximately 400 million in 1990, meaning global travel rose at over 4.5% annually for at least 27 years. Further, this growth is only expected to move faster and faster for the next ten years and beyond as a natural result of rising middle and upper-middle classes in nearly all parts of the world.
Digital Linkages Lead to Physical Desires
The falling relative cost and availability of travel is only one dimension of this story. People are choosing to spend an increasingly larger portion of their disposable income on travel than ever before according to many surveys and studies. In fact, some Millennials are overtly prioritizing travel over marriage, homebuying, and especially starting families. It is seemingly beyond coincidence that the rise in the propensity to travel occurred conjointly with the rise of the digital linkages of the world starting with broadband internet in the late ‘90s and culminating with smartphones and social media in the early ‘10s. The easier it is to “see” each other, communicate with each other, the easier it is and more desirous it is to travel to actually visit each other. The rise of social media has even coined its own phrase for this phenomenon, “FOMO” or “Fear Of Missing Out”. It is beyond obvious that these forces have made larger and larger segments of the general population frequent global and/or domestic travelers; this is a relatively new recent trend, before World War II and the proliferation of the jet airplane, people did not “vacation” in any sense of the word as we know it today. Yes, just getting on an airplane to hop around the country or even the world for anyone but the super elite is a very new phenomenon. Further, it is still very much in the early stages of global adoption. Travelers from many parts of Asia, the Middle East, and Africa, are just earning their wings; further, these places are also becoming new destinations for North American and European travelers (international arrivals to Africa were up 9% annually in recent statistics, the fastest growing destination in the world). In short, travel is becoming more common by more people; the implications are very interesting.
Globalization of Business Leads to Increased Business Travel
During the first internet boom of the late ‘90s, predictions floated around that the need for business travel would be diminished by technological innovations such as high-definition video conferencing and fast data transfer rates for file sharing. As discussed in this post, technology has certainly driven workplace innovation and we are in fact able to work from anywhere in many circumstances. The rise of the “remote” worker is a major trend for businesses of all sizes; at least for those in the knowledge/creative sectors. Thus, it is reasonable to assess if these enhanced digital linkages and business infrastructure systems have, in fact, lessened business travel. The answer is an emphatic NO! Global business travel has increased at rates often double that of global GDP growth; according to the Global Business Travel Association, business travel has averaged a compound annual growth rate of 4.31% since 2008, even factoring a negative -7.5% growth rate in 2009 due to the global financial crisis. This growth rate is forecast to remain approximately the same through 2022; as such, business travel expenditure is expected to reach $1.7 trillion by the end of 2022 with the fastest sources of growth coming from India and China who are expected to grow by 71% and 37% respectively between 2017 and 2022. The linkage between technology, personal “FOMO”, and business travel is not casual. As people incorporate travel into their lives, they seek to do it professionally by attending conferences and choosing to pursue cross-border business opportunities. As such, business travel will be a driver of overall economic demand for decades to come.
Linking Travel Patterns to Local Real Estate Demand
The trend of increasing global and domestic travel due to the democratization of global travel has major implications for future demand of all forms of real estate both residential and commercial. In fact, following the Path of People Movement (POPM) may be one of the strongest indicators of sustainable demand growth for any market. There are two factors that drive the extent to which a market will see increasing or decreasing POPM. First, the region’s external linkages and infrastructure, most importantly via air travel. Second, the quality of life metrics and degree to which a city or region could be the subject of “FOMO”. The first is relatively easy to quantify; the number of direct flights and diversity of destinations from the main airport(s) serving the region. The second is far harder to quantify, but one can easily know it when they see it. New York City has been the leader of these two factors for decades in the US with Los Angeles, Chicago, and Washington D.C. following closely. More interesting are cities like Denver and Seattle, both are now global air hubs and have unique “it” factors that make people want to move there from around the globe. Firms see these factors as justification for locating major operations including global headquarters in such cities. Alternatively, there are markets like Nashville and Austin which have super-strong “it” factors, but relatively limited international airports (however, this is changing). These markets will grow quickly as well, especially as the linkage factor improves. As discussed in this post, new aircraft are making smaller markets more accessible, a trend set to grow over the next decade.
Hospitality has always been viewed as a semi-specialty sector of institutional real estate; increasingly, it has been anointed the “fifth food group” joining the ranks of Office, Multifamily, Retail, and Industrial asset classes that a diversified portfolio must hold. This trend of increasing global travel will clearly increase demand for hotel rooms and tourism properties, but it will also increase the trend of other, traditional forms of real estate operating and looking like a hospitality asset. As discussed before, SaaS and co-living are mergers of hospitality business models with the office and multifamily sector respectively. The cites most set to see increasing demand of such business models will be those dominated by higher rates of POPM. Overall, POPM and global linkages should be measured as part of market assessment for real estate investment for the foreseeable future.