Freitag’s 5: Monthly data continues to confound
 
Freitag’s 5: Monthly data continues to confound
30 JUNE 2017 8:53 AM

The up cycle for the U.S. hotel industry has continued longer than expected, with RevPAR growing for the 87th consecutive month. 

HENDERSONVILLE, Tennessee—The performance results the U.S. hotel industry posted in May came in a bit stronger than expected, as monthly data continues to oscillate and make interpretations a bit hard.

Occupancy growth was very a healthy 1.5%, driven up by a demand increase of 3.4%. Average-daily-rate growth was 2%—what I deem a “normal” growth rate—so revenue per available room grew 3.6%, marking the 87th consecutive month of RevPAR growth.

Last month, demand increased 1%; in March, it was up 4.5%, which of course was all Easter-related. But it begs the question: What is real? And what is the true demand picture in the U.S. as we get into the summer?

1. Mostly positive across chain scales
The healthy increase of occupancy for the U.S. was mirrored across the chain scales. Well, almost all scales. Because the 6% supply growth for upscale hotels was not matched by demand increases—which was still a healthy +5.6%—upscale occupancy declined 0.4%. That said, the luxury (+1.8%) and economy (+2.4%) scales reported the highest occupancy increases.

2. Slowing pipeline growth
After two months of sequential declines, the number of rooms in construction picked up again to 192,000. Even though sequentially this is a small increase—April’s count was 189,000—the room count was up only 16% from the prior year, which is down from last month’s 18% growth and well below the 30% we recorded throughout 2016.

So, I would interpret this to mean that the pipeline is growing but at a much smaller pace. I think this a good sign. Anecdotally, here are the growth rates compared to last year by phase:

In other words, not only are we seeing slower growth in rooms breaking ground, but we actually see a decline in the very early phases. Historically those phases are pretty unreliable, and not every project moves in a nice linear fashion from unconfirmed—which is really more of “I have a dream” than “I have a project”—to in construction. But the decline in those two early phases possibly speaks to the lack of rumors, which will then translate into a smaller number of new projects. Possibly.

Also, it’s worth pointing out that even though the number of luxury and upper-upscale hotels as part of the total pipeline is low (only 18%), the growth has been strong. Upper-upscale rooms under construction are up almost 50% from last year.

And because the upscale room count is so high, the growth rates are slowing (only +4%). The reverse math is true for economy hotels: Last year, we only counted 1,144 rooms in construction; this year, that number is more than 2,000. That equates to an 81% increase, but the absolute count is still the smallest scale number on the pipeline.

3. A look at the top 25 markets
As seems to be the norm by now, the rest of the country outperformed the larger markets. Top 25 market RevPAR growth was just 1.9%, fueled by a 1.5% ADR increase. At the same time, all other markets showed strong RevPAR growth of 4.7%, with gains coming from increases in occupancy (+2%) and ADR (+2.6%).

Part of the equation is the large increase in new rooms in the top 25 markets, as supply increased 2.5%. Luckily, the demand increase for those markets was still very strong (+2.9%). I am just not sure how sustainable an almost 3% demand growth rate can be. The new supply will stay with us for a long time, but demand can vary widely, as we have seen over and over again.

Of course, some of the larger markets had a very healthy May. The chart below shows the markets with the largest RevPAR changes for the month. Keep in mind that this data is likely skewed by group demand that did not occur last year so this data is definitely not a trend. But it is nice to see that ADR growth of 3% or more is happening in some of the major markets.

In all other markets, supply growth has been more manageable (+1.6%) so arguably that is where developers should look for opportunities. Granted “all other markets” is pretty much all of the U.S., and finding the correct street corner is hard. But demand growth of 3.6% for the non-top 25 markets will likely entice a lot of folks to look outside the larger markets. That said, the actual results are still quite strong in the top 25 markets, and hotels there can command on average a nine-point occupancy and $46 rate premium. That is certainly attractive.

4. Strong YTD growth for May
“Summertime and the living is easy, fish are jumpin’ and the RevPAR growth is high.” Or so would George Gershwin sing if he was a hotelier today.

Indeed the year-to-date May RevPAR growth of 3.1% is a bit stronger than I had expected at this part of the year. Looking at the last few years, a drop from last year’s 2.9% growth was probably not an unreasonable expectation, but, well, here we are.

Of course, this is all driven by a 2.5% demand increase combined with 2.4% ADR growth. Supply growth (+1.8%) is on its slow and steady march. But for now, occupancy growth is here (+0.7%) and occupancy records are falling.

The question is if the demand growth we have seen so far is sustainable. Maybe here history can be a guide.

So, we have observed a few years where demand increases did not keep pace with the first five months. Let’s see how 2017 shapes up. Our 2017 demand forecast stands at 1.7% growth, so we expect the next seven months of RevPAR growth to be slower.

5. Full-year forecast
At the recent NYU International Hospitality Industry Investment Conference, STR President and CEO Amanda Hite presented our latest forecast, which was actually a little lower than our ALIS forecast. We now project that RevPAR in 2017 will grow by 2.2%—which was revised downward from 2.5%.

Now obviously when you take into consideration what happened in the first five months, you can figure out what needs to happen for the projection to come true. The math on this works out to be as follows:
RevPAR YTD 3.1%/5 months + X/7 months = 2.2% RevPAR change for the year. Solve for X.

So, X then needs to be 11.1% or the last seven months need to have an average RevPAR growth of 1.6% per month. That does seem conservative, especially if ADR growth comes in at over 2%, because that implies that supply outpaces demand at a pretty strong pace. Solving the same equation for demand implies that monthly demand growth needs to come in at 1.2% for the next seven months (to hit +1.7%), and that does seem indeed low.

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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