Freitag’s 5: US RevPAR growth continues unexpectedly
Freitag’s 5: US RevPAR growth continues unexpectedly
31 MAY 2017 8:31 AM

U.S. hotel RevPAR grew for the 86th consecutive month in April, which raises the question: Where’s the bottom?

HENDERSONVILLE, Tennessee—So, I was wrong. There, I said it.

I was seriously expecting the April U.S. data to show negative revenue per available room and that the industry would break its streak of 85 months of consecutive RevPAR growth. I even showed last month the math how it could happen. Turns out, I was wrong, since I underestimated demand by 2 million roomnights.

1. RevPAR increased 1.7%, driven by ADR growth of 2.4%
I had predicted average-daily-rate growth of 2.5%, and thought occupancy would decline 2.4% (it actually dropped 0.7%). So another month of RevPAR growth—yay! We are now at 86 months of RevPAR growth.

I was of course expecting Easter to have a negative impact on the April numbers, and indeed it did. Demand increased only 1.1%, but then again, the change was positive, and the 103 million rooms sold was the highest April room demand number ever recorded. It was the lowest demand growth recorded this year.

Supply is still doing what it does—the growth rate was 1.8%, in line with the first three months. Last month’s growth was 1.9%, though I would not interpret this to be a sequential decline but due rather to the timing of a few hundred rooms opening.

The subsequent 0.7% occupancy decline made April the second month in 2017 with occupancy declines. But, April’s absolute occupancy of 67.5% is the second highest April occupancy we have ever recorded, behind April 2016.

2. As usual, the story is all about ADR
The ADR growth rate was actually just 2.4%—the same as March 2017. So, riddle me this: In March, in an environment when occupancy increased 2.6%, ADR increased 2.4%; and in April, when occupancy declined 0.7%, ADR increased 2.4%. Why is the room rate increase the same if occupancy goes up or down?

Maybe it’s all about total occupancy? Absolute levels of occupancy were 68% in March and 67.5% in April, so basically the same. Is that the answer?

Or is the answer that in a very strong occupancy growth environment, all the pricing power the industry players can muster is 2.4% (a ceiling), and in an environment when new supply is increasing rapidly and occupancies are declining the industry wants to increase ADR at least 2.4% (a floor) to make up for inflation?

So, there you are—you get an increase that reflects the uncertainty in the macro environment with the realization that smaller increases actually decrease profits, because costs go up. In other words, is ADR growth of 2.4% our new normal? Well, our ADR forecast for the U.S. still stands at 2.8%, and we will see what our CEO Amanda Hite presents at the NYU International Hospitality Industry Investment Conference in early June.

3. Construction slowdown
The U.S. reported 189,000 rooms in construction in April, marking the second sequential monthly decline in rooms in construction. I made a chart detailing the changes in room count (from 194,000 in February) and growth rate (from 33% in December). The year-over-year growth rate is also slowing, if you can call 18% growth a slowdown. Side note: The number of rooms in construction in upscale only increased 9%—a very small number compared to the 25% increase in December.

Is it already time to call the pipeline growth numbers “moderate” and to write odes to the intelligence of the lending community for curtailing construction lending as demand growth slows? Well, at the latest ULI Hotel Development Council meeting I attended a few weeks ago, there still was a very healthy appetite for new construction, and it seemed to me that there was a lot of money sloshing around (technical term) the sidelines of our industry, trying to be deployed. But if we are indeed witnessing a more moderate supply increase over the next few years, the “self-inflicted gunshot wound” of oversupply may be averted. Watch this space.

4. Supply growth hurts top 25
Not unexpectedly, the larger top 25 markets underperformed all other markets, since group travelers stayed away and the leisure demand bump from visiting the in-laws for Easter could only do so much to save the day.

RevPAR in the top 25 markets increased only 0.8%, driven down by occupancy declines of 1.1% (all other markets: -0.6%) and helped a little bit by weak ADR growth of 1.9% (all other markets +2.6%).

As expected, the supply growth in the larger markets was strong (+2.5%) and demand grew much healthier (+1.4%) than in all other markets (+1%). But the supply increases that we have reported on will continue to depress occupancy and likely also give hoteliers in those markets less conviction to push rates in any meaningful manner. Exceptions are nights when citywide conventions are in town, but even there we see a bit of lack of conviction.

The chart below shows the five markets with the largest supply growth in April and their corresponding RevPAR growth (or lack thereof).

I had not really paid much attention to Oahu Island, Hawaii, and Minneapolis. They are sort of sleeper markets, but obviously on the radar of a lot of developers. Houston, Miami and Denver are the usual suspects. The demand numbers are obviously not a trend, but just single data points. Still, the supply figures are here to stay—and will likely increase—with negative implications for those markets.

One other market to call out while we talk about supply is San Francisco, which saw supply decrease 0.2%. During the temporary Moscone Center closing, a few hotels are taking the opportunity to close rooms and/or floors, so we will see the supply data fluctuate in that market.

On the other hand, the leisure demand push during the Easter week was kind to a few markets.

Oh look, even New York City had ADR growth. What a nice surprise.

5. Growth is definitely slowing
Year-to-date demand growth of 2.3% has outpaced year-to-date supply growth of 1.8%, and so occupancy (+0.5%) is at the highest level for year-to-date April ever recorded.

In the last four months, we recorded two months with occupancy above (January and March) and two months with occupancy below (February and April) the same month in 2016. ADR growth so far in 2017 this clocked in at 2.5%, and we are definitely observing slowing growth. The question is where exactly the bottom is.

What’s fascinating is that we are still eking out very small occupancy increases to produce record occupancies, but prices only rise very, very slowly. As I said, our forecast for the year stands at ADR increases of 2.8%, so the question is if the next eight months will really see a meaningful increase in ADR above that level—it really needs to be almost 3%—so we can get to 2.8% growth.

Demand so far this year has actually grown a bit stronger than I had expected. Supply growth is on track, and is now growing three times as quickly as it did in 2013 and 2014.

So maybe the demand numbers so far this year—despite being hard to read on a monthly level—are actually something that should make you feel good about the year ahead.

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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