Freitag’s 5: Hurricanes still driving force in November
Freitag’s 5: Hurricanes still driving force in November
29 DECEMBER 2017 8:56 AM

Revenue per available room grew for the 93rd consecutive month in November, even excluding Texas and Florida, where hurricane-related demand in August and September skewed total U.S. results up. 

HENDERSONVILLE, Tennessee—The positive hangover of the hurricanes that has increased room demand in Texas and Florida continues to boost U.S. room demand.

In November, room demand increased 3.6%, driving up occupancy by 1.6% and revenue per available room by 3.9%. This was the 93rd consecutive month of RevPAR growth. Excluding Texas and Florida, however, still leaves RevPAR growth positive, but much less so (+2.3%).

1. Demand record
November room demand was the highest for any November ever (95 million roomnights). Demand increased by 3.6%, marking the third straight month that demand increased by more than 3% year over year. Let’s see what December holds.

But the hurricane impact was certainly noticeable over the last few months, given how much the states of Florida and Texas are skewing the numbers up:

I met with some bankers in New York City a few weeks ago and explained this data and the underlying reason for the RevPAR strength. One banker commented, “I don’t care, Jan; I just want growth.” Well, growth is certainly what we got—and will get into the first quarter of 2018.

2. New supply a drag on occupancy
Group occupancy declined 0.4% and transient occupancy was only up 1.9%. The underlying demand data was pretty positive (group: +1.2%, transient +3.6%), but obviously new supply matters now and will matter going forward, so even a moderate increase in rooms sold will be absorbed by the new rooms in the market. I would not be surprised if group occupancy continues to show slow or no growth in the next few quarters—outside of any calendar shifts—as seen so far this year.

3. Slow ADR growth
Group ADR increased 1.6% and transient ADR increased only 1%. Given that the rate of inflation is picking up, the top-line growth on the high end might not make up for the cost increases, meaning operators will have a hard time holding on to their bottom-line profits.

The slow growth results should not come as a surprise by now given what we have observed in the last few months. Clearly the second half of the year has seen rapid deterioration in pricing power as occupancy growth slowed for transient and declined in group.

4. Pipeline growth flat again
In October, the number of rooms in construction declined year over year for the first time since 2010. I was not sure if that was a trend or “anecdata” (as STR VP of digital data solutions Chris Crenshaw calls it). Well, this month the number of rooms in construction is up 0.6%—in other words, “flat” again, and yes, we should now call this a “trend.”

There are 184,000 rooms in construction, still well below the prior peak of 211,000 rooms in late 2007. If the current trend holds, we might not see an increase of rooms to that level since it would imply another 15% growth.

What is causing the slowdown? I can only think about construction financing as the governing force since developers across the lands are probably still pretty bullish on the lodging industry and this cycle in particular.

But if I was a loan officer having to underwrite a new-construction project and was looking at 93 months of consecutive RevPAR growth, it is probably not too unrealistic to underwrite a RevPAR slowdown, which would then make the numbers harder to pan out. That sentiment might vary—looking at you, Nashville and NYC—but overall lending for select-service projects will probably be a bit harder to come by going forward.

I showed this table the last few months, and it is still enlightening in November:

5. Top 25 markets appear healthy
So, no surprise, when the U.S. does well, the top 25 largest markets do very well. RevPAR increased 4.6%, driven by very strong demand growth of 5%. This was actually a stronger increase than last month’s 4.6% growth.

Absolute occupancy of 71.1% was the first time ever that November occupancy clocked in at over 70%. So, we expect December occupancy to be below 70%, but this means that in 2017, 10 of the 12 months showed occupancy of more than 70%—certainly a very healthy performance.

But the new supply is coming, and new room openings increased by 2.5%. I think it’s worth calling out the fact that the supply percent change is actually not on an upward trajectory; in other words, it has increased between 2.3% and 2.5% all year.

So, given that just under 50% of all rooms in construction are in those top markets, and that we started the year with a growth rate of 2.5%, I would have thought that by now the rate would have accelerated. Well, it has not and that probably bodes well for the future performance in those markets.

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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