US hotels’ January pace: Winter blues or new normal?
 
US hotels’ January pace: Winter blues or new normal?
28 FEBRUARY 2019 9:19 AM

U.S. hotel RevPAR increased 1.5% in January, which could indicate the rest of 2019 will yield more of the same slowing growth.

HENDERSONVILLE, Tennessee—January is traditionally a slow month in the industry and this January was no different.

1. Signs of a slowdown
January revenue per available room increased 1.5%, the lowest January RevPAR growth this up-cycle (since 2011) and the lowest RevPAR growth—if you exclude the hurricane comp of September 2018—since July 2017. This should not come as a surprise to regular readers, but things are indeed slowing down, meaning that the industry is still growing but at a slower rate of growth. Moving sort of like molasses.

ADR growth of 0.8% was the lowest monthly growth rate this up-cycle (since May 2010), which is a sad showing. Luckily, the inflation growth rate for the U.S. came in around 0.2%, so we are still in a low-inflation environment. However—as we’ve discussed in the last few months—profitability will be hard to come by given this ADR growth pace.

Occupancy increased 0.7%, which is the new normal, and we expect that number to oscillate but trend downward over the year. Our occupancy forecast stands at 0% for 2019, so I guess we are on track for that. Here is the pace for the last few months:

 

The occupancy change is a function of the 2% supply growth, and this is no surprise since this will likely not change much as 2019 progresses. The occupancy growth implies that demand was actually up at a healthy clip: 2.7%. As with every month since 2010, this is the highest room demand for this month ever achieved at roughly 88.7 million roomnights sold. Here’s a piece of random trivia: The first month that the U.S. hotel industry ever sold around 89 million roomnights was in July 1998, which was the strongest demand month ever up to that month.

Let me update this table I showed last month, just for shock value. This January saw the highest absolute occupancy ever for a January, but a lower ADR growth than in any January this up-cycle:
2. New 2019 forecast
Vail Ross presented our new STR forecast at the Americas Lodging Investment Summit and the outlook is, not surprisingly, muted. We expect more growth on the supply side (+1.9%) and the demand side (+1.9%) which will make the absolute values the highest ever. This then leads to 0% occupancy change and hence, if this comes true, our national occupancy will again be the highest ever, or tied to be highest with 2018. We predict right now that ADR growth will be 2.3%. ADR growth—or lack thereof—then drives 2.3% RevPAR growth.

An equity analyst wanted to bet me that we are too low, but ultimately he got cold feet so we did not bet. But I stand by the conviction that if 2018 was not the year for ADR growth (and arguably it was not) then 2019 will definitely not be the year that ADR growth suddenly accelerates.
What could go wrong with this forecast? For one, economic growth could slow and demand growth could be more muted. We and our friends from Tourism Economics do not foresee that, but it is a possibility. What else? Well, ADR growth could come in higher than we project, but I doubt it. Supply change will be right where we pegged it. So in all, we might be too low in our occupancy and ADR forecast but I do not find that likely. Let’s have a look after preliminary May data comes out and see how or if we revise our forecast for the NYU conference in June.

3. Segmentation data
January was a pretty healthy month for group demand (+2.3%) and sort of OK for transient demand (+1.4%). Both segments lost occupancy but group ADR gained at a good clip at 3%.
Putting this into perspective with last year, something interesting emerges:
2018 started with healthy transient ADR growth as hoteliers somewhat took advantage of demand increases. Group ADR, which showed group rates that were negotiated four to six quarters earlier, came in a muted pace. But as STR data continued to point at full hotels, hoteliers seemed to gain confidence and negotiated group rooms from a stronger positions, and these are the revenue and ADR numbers we’re now reporting on. But at the same time, transient ADR growth has declined compared to a year earlier, so is this a sign of less confidence in the market, and will we see lower ADR growth rates on the group side in the later part of 2019? Stay tuned.

4. Pipeline data
The number of rooms in construction increased 4.5% year over year in January to 196,000 rooms. Last month, I said that we should keep an eye out on this number to see how it moves and/or accelerates.

But the pace at which rooms in construction increased actually slowed from 6.6% to 4.5% between December and January. This means that Bobby McFerrin’s and my sentiment of “don’t worry, be happy” with regards to U.S. pipeline growth seems to have been right on the money. We are still 15,000 rooms below the prior peak of rooms in construction from mid-2007, and there is nothing in the data, in conversations I have, or in the articles I read on HHN or elsewhere that leads me to believe that the financing and developing environment is heating up.

5. Comments about the top 25 markets
Demand in the U.S. top 25 markets was flat (0.0%), and since supply growth is concentrated in those large markets (+2.7%) occupancy declined accordingly (-2.7%). ADR growth was non-existent—or I guess existed but was very small (+1%). RevPAR declined 1.5%. But still, despite being a slow month and declining performance, the occupancy in those larger markets was 62.8%.

If the average RevPAR decline is 1.5%, it implies that a lot of markets had much worse performance. A total of 14 markets of the top 25 lost RevPAR. Here are the markets that registered the strongest RevPAR declines:
It’s probably not a real surprise, but those RevPAR declines went hand in hand—or were likely caused by—demand declines. I assume a lot of these markets had a specific group in 2018 that did not return in 2019. The poster child is Minneapolis, which hosted the Super Bowl last year. D.C. suffered through the partial government shutdown. Houston is still living through the tough hurricane comps from late 2017 and early 2018. But FEMA stopped paying for rooms for displaced people in the spring of 2018, so now the comps will get easier.

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.

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