Freitag’s 5: US July numbers might tease cycle’s end
Freitag’s 5: US July numbers might tease cycle’s end
24 AUGUST 2017 9:10 AM

The end of the cycle could be closer than you think, if how U.S. hotels performed in July is any indication.

HENDERSONVILLE, Tennessee—July data for the U.S. hotel industry was a mixed bag, ranging from some very strong absolute performances to less-than-impressive percent changes.

But first, let’s talk about updated forecast numbers from STR, parent company of Hotel News Now.

At the recent Hotel Data Conference, STR President and CEO Amanda Hite presented the company’s new forecast, which reflects the fact that, so far, we have underestimated demand increases in the U.S. We revised those up and took average daily rate down a smidge (technical term).

So basically we think that supply and demand are in equilibrium this year (+2%) and then in 2018 we will see the occupancy decline (-0.2%), which we predicted for this year—as it turns out, too early. Room-rate growth is slow (+2.3%), and even though we are projecting a slightly stronger ADR increase in 2018 (+2.5%), I would not read too much into that and basically call that “flat” growth—i.e. growth at the pace of this year.

With all that in mind, let’s examine how U.S. hotels performed in July.

1. Higher supply causes occupancy to fall
In July, U.S. hotels reported a 0.5% occupancy decline—only the third time this year that has happened. It was a function of the expected increase in rooms available (+1.9%) and a demand increase (+1.4%) that was a bit slower than expected given the last few months.

So will things be falling apart? It will be very interesting to see if a national decline in occupancy will have a signal effect on room rates. ADR increased only 1.4%, the lowest room-rate growth this year.

All this led to barely noticeable positive revenue-per-available-room growth of 0.8%—the lowest this year. You really had to look closely to see it. This is the 89th month of consecutive RevPAR growth and, as you know, we expect more growth as the year progresses, partially because room demand continues to hold. The industry sold 118 million roomnights, which is the single largest room demand in any month ever recorded. Ever. It eclipsed last year’s July record “totality.” Sorry, I meant “totally.”

2. Calendar shift brings silver lining
The calendar did not help since we traded a Monday—historically a lower-occupancy night—with a Friday—historically a higher-occupancy night—compared to last year’s July. However, this is the first time that the Friday occupancy for a month hit 80%.

I interpret this to mean that leisure travelers and U.S. consumers overall are hitting the road and taking full advantage of summer weekends.

So, we will be watching the demand figure for August. Following that, the Jewish calendar shift will make the September and October data hard to read. Then the year is basically over.

July was the first month with subpar performance with supply negating the demand increase. Keep an eye on August as an indicator of how the industry will fare this year.

3. Top 25 markets feeling pinch
RevPAR declined 0.4% in the top 25 markets. RevPAR declines based on occupancy declines (-1%) that are not made up for by stronger ADR increases (+0.6%) is probably how this cycle will end. I thought we could hold that reality off a bit longer, but here we are.

A total of 16 of the top 25 markets grew room supply faster than the U.S. average (+1.9%), and in some markets that spells ADR declines. Now, I grant you that the 21.5% ADR decline in Philadelphia probably hurt the average rate increase for the top 25 markets. But still, it’s getting a bit harder to drive RevPAR.

The 2.5% increase in supply growth is taking its toll on the top 25 markets given that demand only increased 1.5%. That demand increase points at a record of total rooms sold for the top 25 markets since demand has never declined. But the total number of rooms available is also a record and growing more quickly.

4. Group data hurt by 2016 conventions
Transient RevPAR was in line with recent performance and increased 2.3%, driven up by transient occupancy, which increased 2.1%. But group RevPAR declined 4.6%, driven down by an occupancy decline of 6.1%.

Keep in mind that comps matter, as they normally do when we observe wild gyrations in the data. Remember that both Cleveland and Philadelphia hosted national political conventions in July 2016. So, when we look at the July 2017 decline in demand and revenue for the group segment, these two markets had a sizeable impact.

Not surprisingly, two very large citywide conventions that provided significant ADR lift to their host cities had a disproportionate impact on the group data decline this year.

5. Class bookends boost RevPAR
In July, class* data mirrored the total U.S. data across the board. Only luxury hotels increased their occupancy, and ADR growth was varied, but lower-rated classes performed slightly better.

RevPAR declined for upscale and upper-midscale properties since the supply growth—as expected—is taking its toll. It’s interesting to note that the lower-end classes actually recorded demand drops and ADR increases.  

In July, all classes except for economy recorded occupancies in excess of 70%.

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.

*Correction 24 August 2017: A previous version of this article misclassified the data set used in this analysis. 

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