Freitag’s 5: Easter shift gets credit now, blame later
 
Freitag’s 5: Easter shift gets credit now, blame later
28 APRIL 2017 8:29 AM

U.S. hotels saw a dramatic boost in performance in March because the Easter holiday shifted to April on the calendar in 2017. But the drop next month is expected to be just as dramatic. 

HENDERSONVILLE, Tennessee—Easter fell in April in 2017 and in March in 2016, so this year’s March data was comparatively strong as group and transient business shifted.

March 2017 data was off the charts in a good way (as I detail below), and it will be off the charts in a much worse way next month, and it’s all because of the Easter shift. So, it’s really hard to interpret.

Analysts will probably just sit and wait until we release May data, which comes out in June, but by then, 2017 will be halfway over already.

1. Harbinger of things to come?
Room demand increased by 4.6% to more than 106 million roomnights sold—the highest March room demand number ever recorded. That’s also the highest monthly demand growth rate in three years (since 2015).

Because room supply increased at the expected pace of 1.9%, occupancy increased 2.6% to 68%—the highest March occupancy ever recorded. Despite the surge in demand and occupancy growth, room rates only increased 2.4%—a somewhat softer increase than expected given the amount of travelers, and probably a harbinger of puny average-daily-rate increases to come.

Did you know that the term harbinger comes from the German “herberge,” meaning lodging, and morphed from herald, meaning a person who was sent ahead to find lodging for their troops? I did not either.

Positive ADR and occupancy growth then led to the strong 5.1% revenue-per-available-room growth—the strongest this year. We have now recorded 85 months of consecutive RevPAR growth, and it will be interesting to see if this indeed is the final month of that run. More about that below.

2. Lack of transient pricing power
Segmentation data was, as expected very, very strong, since meeting planners stayed away from the two weeks around Easter last year and booked events in those weeks this year.

Group RevPAR increased 15.5%—the largest increase in the last four years. This rise was driven primarily, and not surprisingly, by a 10.8% increase in occupancy. Group ADR growth was healthy at 4.8%.

Transient demand declined 0.5%, transient occupancy was down 2.3% and transient ADR was up only 1.4%. If there is anything worrisome in the all the positive data, it is exactly this data point. The lack of transient pricing power has been on my mind, and I have talked about it the last few months.

In an environment of very easy comparables, the fact that the change is so small, or even negative, does not bode well for the underlying health of the transient business. Frankly, I was quite surprised that the number of transient rooms in March was lower than a year ago. Let’s see what April brings.

3. Slowdown in pipeline?
The number of rooms in construction in March (191,000) was actually lower than in February (195,000), marking the first time in a long time that the construction numbers dipped. While I love to point at the Easter shift as the reason for all things “egg-cellent,” it probably had no influence on the construction numbers.

So, what could it mean? Well, the room count percent growth from same month last year is 24%, down from the average of 30% that it has been for a quite a while. Maybe we are indeed seeing a slowing in construction lending, which would bode well for the industry overall. Maybe this is just a seasonal, weather-related dip and the numbers will increase as we get into the summer. Let’s keep an eye on this and see what develops.

The total under contract count stands at 571,000 rooms, also down from February’s 578,000 rooms. The percent change from March 2016 is 14%, so still a sizeable increase.

I said last month that the 27% increase in January rooms in construction was a blip (February was back to 30%). But maybe my interpretation was incorrect and actually the February data was the blip and this month’s data (and January’s) was actually more true to reality—meaning that the growth rates of the construction pipeline rooms could be showing some signs of slowing down.

That all said, approximately two-thirds of all rooms being built are upscale and upper midscale rooms. What is also noteworthy is the fact that four of the top 25 markets now report a potential double-digit supply growth (when dividing existing supply by rooms currently being built).

4. Smaller markets outperform the big
The top 25 markets actually had quite a poor showing in March. RevPAR increased 2.3%, so basically half of the U.S. average (+5.1%). This implies, of course, that all other markets recorded tremendous growth of 7.1%. Occupancy in the larger markets was up 0.9%, compared to a 3.5% increase in all other markets, and ADR growth was a muted 1.4% (all other markets: +3.5%).

So, as discussed above, the larger hotels in the upper chain scales performed relatively poorly. Since the distribution of smaller/select-service hotels is stronger in markets outside the larger metros, this strong performance makes sense to me. Part of the discussion has to be the supply growth of 2.6%, which will put a damper on any strong occupancy growth going forward. Six markets reported RevPAR declines:

Interestingly, three of the above markets—New York City, Houston and Miami—showed very healthy demand increases. Still, ADR declines across the board for these markets then led to drops in RevPAR. As I said last month, Los Angeles and San Francisco will have to deal with headwinds going forward because of a strong 2016 and, specific to San Francisco, the convention center closing.

5. Do the math
So, Jan, is it possible that in April, RevPAR will decline for the first time in 86 months? Yes. Why would I say that? Well, let’s do the math:

  • Sum last year’s supply, demand and revenue for March and April;
  • apply a reasonable growth rate to those three numbers to come up with an estimated total for this year’s March and April results;
  • deduct March actuals from that estimate, which gives you an April estimate; and
  • calculate April RevPAR percent change against last year’s April RevPAR.

Of course, the applied growth rates can be debated. I think that a 1.9% supply growth rate is reasonable given this month’s data. For the two prior years, the combined March and April growth rates were 2.8% (2015) and 2.2% (2016) for demand, and 7.8% (2015) and 5.4% (2016) for revenue. So growth rates of 2% for demand and 4.5% for revenue do not seem too unreasonable.

That said, if the supply change is higher, and the revenue change is lower, the RevPAR change would be negatively affected.

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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