U.S. hotel performance continued to break records in April, but not everything is coming up roses.
BROOMFIELD, Colorado—While there is a recurring theme of general positivity this month—surprise, revenue per available room is still growing—there are a few weeds in the lawn. (I just now made up that annoying metaphor, and am going to do my best to make it viral.)
The state of the hotel economy is good
Ninety-eight months of RevPAR growth and counting. Breaking records is starting to sound like a broken record—every month a new all-time high RevPAR, every month another period of growth in this expansion cycle.
From December 1991 to March 2001, RevPAR grew every month with one exception: a very slight decline in August 1998. So, technically speaking, we are now in the midst of the longest-running expansion cycle in the recorded history of the U.S. lodging industry.
And here’s something interesting: In the 112-month expansion cycle of the ’90s, average monthly RevPAR growth was 4.2%. In the current 98-month cycle, it’s 5.9%. Considering inflation is substantially lower now than it was in the ’90s, this is impressive. You could argue the average growth is higher now since the crash of 2009 was so severe, but if you even exclude the exceptional growth of the 2010 and 2011 recovery years, the average RevPAR growth still stands at 5.3%.
The substantial 4.2% RevPAR growth in April was driven predominantly by rate growth (+3.3%), though occupancy still gained ground to the tune of about a percentage point (+0.9%). The Easter comp didn’t seem to have a marked overall impact in either March or April this year, as occupancy movement was similar each month—up about a point—as was demand, which was up about three points for each month. There was evidence of the shift in the segmentation numbers, however, which I’ll get to below.
Now that a third of the year is in the books, what do the overall numbers tell us?
1. Demand in 2018 is outperforming estimates
We’d heard as much in the recent spate of REIT and C-Corps earnings calls. Most public lodging companies met or exceeded their Q1 estimates, and many are adjusting their year-end RevPAR outlook by upwards of 150 basis points. The healthy economy is giving more confidence to transient travelers—both corporate and leisure—which is good news for hotels as we lean into the busy summer months.
Weeds in the lawn: Interest rates, inflation and gas prices are all on the rise, which collectively might inhibit overall RevPAR growth potential through the summer. Plus, transient demand in April was fairly anemic.
2. Rate growth is showing signs of life
The industry hadn’t seen monthly average-daily-rate growth in excess of 3% since January 2017—until last month, when it reached 3.1%. And April’s 3.3% rate growth proves this wasn’t a fluke. Pricing power is coming alive with the strong demand growth. Of course, two months does not establish a clear trend, and we’ve seen rate growth flutter about in fits and starts before. But this is the fourth straight month of ever-increasing rate growth, which is promising.
Weeds in the lawn: Inflation also increased in April, so real average rate growth on a running-12-month basis is still negligible.
3. New supply is still not an issue
Yes, the April supply increase hit 2.1%, the highest monthly increase since April 2010. Yes, this has been expected. But as I’ve always preached, new supply has never been an industry killer. Supply, in fact, has remained historically low for this powerful an expansion cycle. To wit: In the expansion cycle of the ’90s, monthly supply growth averaged 2.4%. In this cycle, it’s averaging 1% monthly.
Weeds in the lawn: National supply averages sound great unless you’re operating a hotel in a market where new hotels are being built in droves. Sorry, Nashville, New York and Denver.
4. The industry just might have skipped a downturn
Since 2014, annual RevPAR growth has steadily declined each year. However, in the April year-to-date period, 2018 RevPAR growth is 80 basis points ahead of last year, setting up for the potential of the 2018 calendar year outperforming 2017.
Weeds in the lawn (you know you’re going to start saying that): It’s a fool’s errand to extrapolate four months of performance on an entire year, and the hotel economy remains highly correlated to shifts in the broader economy. Although most economic indicators remain solid, the Cboe Volatility Index, otherwise known as Wall Street’s “fear gauge” that measures market swings, has been surging this year after remaining at historically low levels for most of 2017. Uncertainty is still highly pervasive in the markets.
Hotels had a whopping month with groups
While the Easter holiday shift didn’t have a pronounced swing on the March/April numbers, a shift does become apparent when breaking the numbers into the group and transient segments. After a 5.2% decline in group in March, group occupancy was up 8% in April, as my STR colleague Jan Freitag correctly predicted. Combined with healthy rate growth, group RevPAR surged 13% in April. (STR is the parent company of Hotel News Now.)
Conversely, Jan predicted essentially flat transient RevPAR growth in April, and again the man was a sage. Transient RevPAR nudged up just 0.2%, with offsetting occupancy declines and rate increases. So what does this mean? Not much, or at least not much beyond what we were already expecting, though group demand is showing a bit more life than perhaps expected, and the running-12-month group RevPAR is positive (0.2%) for the first time since August 2017.
Pricing power evident in luxury and economy classes
Continuing the trend we saw in March, the year-to-date pricing continues to be the most robust in the luxury and economy classes, with April YTD average rate increases of 3.2% and 3.5%, respectively. Upper-upscale and upscale classes continue with sub-2% rate growth, while all classes across the board saw modest occupancy lifts.
For the trailing 12-month period, demand has been the most robust in the upscale and upper-midscale classes—5.3% and 4.9%, respectively—which is understandable given these classes represent the concentration of new supply. Overall, RevPAR has grown in all classes over the past 12 months, with rate increases accounting for the majority of the growth.
Top 25 markets
April was even a stronger month than March for the top 25 markets in the U.S., and ADR growth in the major metros once again lifted overall U.S. results. In the larger markets, room rates increased 3.9% and RevPAR increased 4.4%. Supply growth stands now at 2.7%, nearly 100 basis points above “all other markets,” where supply grew 1.8%.
San Francisco and New Orleans each had double-digit ADR gains, with Houston and Denver joining those two markets for double-digit RevPAR gains for the month. Notable RevPAR losses were seen in Boston; Norfolk/Virginia Beach, Virginia; Orlando, Florida; and St. Louis.
For the April year-to-date period, Minneapolis is leading the top 25 markets with a 19.1% RevPAR gain (thank you, Super Bowl), followed by Miami (+14.1%) and Philadelphia (+9.8%).
- The hotel economy isn’t just “holding on,” it’s accelerating.
- Supply grows, but is truly only problematic in certain locales.
- Demand remains impressive, which bodes well for the busy summer months.
- Pricing power shows signs of life. Let’s see if it continues.
- Travelers should prepare to pay more at luxury and economy hotels—as those classes have shown the greatest rate gains this year.
- Hotels continue to show robust profitability, despite labor cost woes.
- Don’t forget the hotel economy is predicated on the broader economy. We’ll be keeping an eye on interest rates, inflation and gas prices.
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.