Freitag’s 5: US hotels back to ‘normal’ in February
Freitag’s 5: US hotels back to ‘normal’ in February
27 MARCH 2017 8:24 AM

Sluggish RevPAR and ADR growth, coupled with declining occupancy, does not bode well for U.S. hotels for the rest of 2017. 

HENDERSONVILLE, Tennessee—After a strong Washington, D.C.-influenced January, U.S. hotel performance came back down to earth and looked a bit more normal, if you call sub-2% revenue-per-available-room growth “normal.”

1. More empty rooms
Occupancy actually declined 0.5% and the weak average-daily-rate growth of 1.7% led us to rather weak RevPAR growth of 1.2%. This was actually the second consecutive February where occupancy declined, so the absolute value of 61.2% was only the third-strongest since 2000. And the small ADR growth (+1.7%) was the lowest since October 2010, so in 76 months.

For our projection of 2.5% RevPAR growth to come true, we need more ADR growth. The muted ADR growth in February was lower than I would have expected, and some of it may be explained by the decrease in occupancy, which was caused by very sluggish demand growth of 1.4%. Couple that with the ever-accelerating supply growth number (+1.9% in February), and you get more empty rooms. More empty rooms at a slightly higher room rate still equals RevPAR growth, now for the 84th consecutive month. But it’s possible that this streak could come to end with a negative RevPAR growth month in April (caused by the Easter shift), so stay tuned.

2. Sagging group demand
Segmentation data was equally weak. RevPAR was down for the group segment (-1.8%) and only very slightly up for transient travelers (+0.9%). Group demand was down 1.1%, and in six of 12 months last year, we reported declines in group room demand.

So far this year, we are hitting the 50% mark again (January was up because of the boost from Washington, D.C.). Group ADR growth was just 1.3%—only the second month of sub-2% group room rate growth since last March, which included the 2016 Easter calendar shift. So, sluggish group ADR growth in a fairly clean month does not bode well for rest of the year. Transient ADR was basically flat (+0.7%), which also is not a good omen for things to come on the segmentation front.

According to the above table, it looks like in 2016 the first six months of transient ADR growth was much weaker than the second half of the year. That could be a positive sign of things to come, so let’s see if that holds.

The coming months will have all sorts of noise in them because of Easter, and it will be hard to interpret any of the data. But I am afraid that when the dust settles and a clean month comes along, perhaps as soon as May, we will realize that the calendar shift covered up all sorts of weaknesses in the group data. We will see.

3. More rooms coming
The pipeline keeps increasing, although the percent change for in construction rooms did not budge (+30%). Since the base keeps getting bigger and bigger, that same percent change means of course more actual rooms. There are now 195,000 rooms in construction in the United States, so last month’s 27% growth rate was a blip.

The upscale development train has plenty of power: If all rooms in construction opened tomorrow—which they won’t, but just for giggles, bear with me—the theoretical supply increase would be an additional 9%. If all under contract rooms opened tomorrow, the supply growth would be 22%.

To be more realistic, the rooms in construction today will probably open over the next 24 months or so, so that is still a theoretical 4.5% growth rate per year. And to fill all those rooms at a 70% occupancy rate or more, you have to make some very, very healthy demand assumptions.

Will all of those rooms sold be purely incremental demand? Upper upscale and upscale hoteliers and owners sure hope so. Otherwise, it implies that they are the ones bleeding demand.

4. Fewer people visiting some large markets
RevPAR growth for the top 25 markets was 0.8%—I should say “only +0.8%,” because basically that means that RevPAR did not really grow at all. Occupancy declined 1% to 70.3%. So, still seven of 10 rooms were sold. But for the larger markets that number should really be meaningfully above 70% for higher profitability to kick in, so this number is actually not very strong.

Among the reasons for that result is, of course, the 2.6% supply increase, which was well ahead of demand’s 1.5% growth. Demand growth in all other markets was 1.3%. There seems to be no difference in demand increase between the large markets and everyone else. But then, supply growth is 100 basis points lower in all other markets (+1.6%) so if this demand pattern holds, we can expect meaningful occupancy declines in the large markets.

Here are the five markets with the strongest RevPAR declines in February. I have include the demand change to show that in most of these markets saw fewer visitors, with the exception of Miami.

5. Adjusting for leap year
In 2016, February had 29 days, and this year the month only had 28. We do adjust the leap year data so to not artificially inflate the percent changes. How we do that is explained here.

This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.

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