U.S. hotel occupancy declined in July for the first time in a year, but with demand continuing to increase, hoteliers should be feeling fine as the summer breeze creates a performance tailwind.
HENDERSONVILLE, Tennessee—“Summertime, and the living is easy,” someone once said. “As is running a hotel,” I might add.
July results were good, and the healthy U.S. economy led to a record-breaking performance of the hotel industry.
1. A new demand record
July results were tepid. Revenue per available room only grew 1.8%—and RevPAR has now increased 101 months in a row—but occupancy declined (-0.2%) for the first time in the last 12 months. Still, 73.6% of all rooms were occupied. Demand grew and the July room demand of 120 million roomnights sold is the highest single demand month ever, back to the beginning of recorded time (1989).
Room supply increased 2.1%, which is not a surprise, and despite the strong absolute demand, the change from last year was “only” 1.9% growth, hence the occupancy decline. ADR growth was also slow, at only 2%, which was the lowest so far in 2018.
2. Chain scale and class performance
The higher-end chain scales still managed to do well. Luxury and upper-upscale chains reported the highest RevPAR growth, but when you add the high-end independents, a slightly less rosy picture appears in the class data.
Conversely, the independent lower-end properties lifted the economy chain-scale data to give the economy class a good boost. In the past, I stopped commenting on the chain-scale data since it basically omits one-third of all rooms—the independents. But once in a while it is good to remember that the class data is indeed comprised of both elements—chains and independents—and it looks like the upper-end chains did well in July. As we have seen all throughout the year, the continued high levels of GDP growth and low unemployment helped everyone, but then coupled with an actual room supply decline (-0.2%) this good news has boosted the performance of hotels in the economy class.
3. Pipeline on the rise?
The number of rooms in construction increased by 0.8% in July. This was the first time in eight months that it actually increased, if you want to call a sub-1% change an “increase.” Basically, construction numbers have been flat at around 190,000 rooms in construction.
The majority of these rooms are still upscale and upper midscale—when combined, both segments comprise about 120,000 rooms or 63%. When looking at the full pipeline, an interesting trend seems to appear that I had not spent any time on: the resurgence of the economy room. Luxury and economy results have been strong, as I have pointed out in the past. And the luxury pipeline, while still small—and expensive to build—is growing. But economy rooms seem suddenly en vogue again.
So, the number of economy rooms under contract has jumped from 4,400 to 14,900 between 2016 and 2018. It’s both interesting and noteworthy.
4. Year-to-date numbers strong
Now that we have seven months under our belt in 2018, it’s hard to find anything wrong with the current environment.
Supply growth is in check (+2%). Demand growth is still almost a full percent ahead (+2.9%) and in only one month—July—it grew less than 2%. It’s true that occupancy has now declined in the three last Julys—starting in 2016—but each July, we recorded the highest single room demand ever. We sold more rooms so far this year than in the full year of 1988.
Year-to-date occupancy clocks in solidly at 67.1%; so only one in three rooms is empty each night on average, though your mileage may vary. ADR has grown over 3% in three of the seven months and YTD growth now stands at 2.6%, pushing RevPAR growth to 3.5%.
It’s also nice to see that the additional number of rooms sold—when compared to the prior YTD demand—seems to actually grow. Even though we are 101 months into a RevPAR up-cycle the industry somehow finds more guests faster than in prior years.
So, demand growth is strong and the absolute changes are actually getting stronger.
5. What to glean from STR’s new US forecast
During the Hotel Data Conference, STR President and CEO Amanda Hite released the latest U.S. forecast. The first six months of the year were so strong that even without adjusting any data on the back end, we had to lift our 2018 data.
But then we also adjusted our second-half data up a little bit. We expect that the small demand increase will continue to be source of record rooms sold and the highest occupancies ever, which then lets hoteliers realize pricing power above CPI. Fingers crossed.
The 2019 scale forecast is detailed below:
As an eagle-eyed equity analyst pointed out, the individual scale RevPAR change results are all lower than the combined average of 2.6% growth. How can that be? Well, there is something at play here called “Simpson’s Paradox” in which a trend appears in several different groups of data but disappears or reverses when these groups are combined. Cool, huh?
Jan Freitag is the SVP of lodging insights at STR.
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.