June data shows US hotels’ rocket is losing fuel
 
June data shows US hotels’ rocket is losing fuel
30 JULY 2019 8:07 AM

U.S. year-over-year monthly RevPAR decreased for the second time this cycle as slowing room demand growth potentially signals the hotel industry’s spaceship is re-entering a downturn’s orbit.

HENDERSONVILLE, Tennessee—Seven years before Neil Armstrong sunk his moon boot into the Sea of Tranquility on 20 July 1969, U.S. President John F. Kennedy gave a speech in Houston and declared, “We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard.”

And hard it was. Sort of like managing in the hotel industry in 2019.

1. No new record for RevPAR growth
U.S. hotel revenue per available room in June declined by 0.4%, marking the second occurrence in the last 112 months that RevPAR has decreased. That means the prior record of 111 months of RevPAR growth (in a 112-month period, back in the ’90s) still stands.

Room demand increased only 0.6%, the lowest increase this year and the third-lowest in the past 18 months. Yes, June room demand (118 million rooms sold) is a new June high, but the industry only sold 700,000 more rooms than a year ago, a very poor showing after selling over 2 million more rooms in each of the prior months.

Any sub-2% demand growth leads to occupancy declines since supply is up, and in June occupancy declined 1.3%. Which, if you follow along at home, is the second decline this year and the fourth in the past 18 months. Occupancy declines lead to average-daily-rate softness, and growth was a now-almost-common sub-1% (actually +0.9%).

2. Real ADR growth out of our orbit
That gets us to four months of sub-1% ADR growth. Growth is growth, but growth of this magnitude makes us go back to our favorite macroeconomic chart that shows “real ADR” growth:

Wouldn’t you know it, we figured out how to engineer an object that could achieve escape velocity from Earth at 17,432 mph, but we could not, in the strongest demand environment ever, figure out positive real ADR growth. So, for the last four quarters (yes, a full year), real ADR has decreased.

3. Demand only barely edging past supply
Looking at the quarterly table above, you can do your own math: Year-to-date RevPAR is up 1.2%. So far this year, room demand growth (+2.1%) has outpaced supply growth (+2%), but barely. I would assume this level of demand increase (actually a slightly lower number) for the remainder of the year to get us to the projected 2% demand increase.

But for now, our RevPAR forecast stands. STR CEO Amanda Hite will present our new forecast in a few weeks during the Hotel Data Conference. Stay tuned. (STR is the parent company of Hotel News Now.)

4. June 12MMA occupancy falls below May
Well, it finally happened, 12-month-moving-average occupancy is no longer at record levels. June 12MMA occupancy at 66.2% was below the May result of 66.3%. Occupancy bottomed out in January 2010 (54.5%), and we had reported consecutively higher annualized occupancies ever since. Starting in May 2015 (64.9%), each month we reported the highest annualized occupancy ever—until now. Let’s raise a coffee in salute to the end of a good run, and the end of STR presenters saying on stage “the highest occupancy ever recorded.”

It is of course possible that the monthly data will be revised, as data sometimes is, so we may still be in record territory and just don’t know it yet, but for now the party line is that the streak is broken.

5. Do we have it backwards?
I recently had lunch with a former real estate professor of mine from hotel school, and, as geeks do, we discussed lack of pricing power in the hotel industry. I rolled out the old “highest occupancy ever, highest demand ever, no rate growth” cliché, and he basically said (I am paraphrasing): “What if ADR growth is not the goal? What if you are wrong and the actions of 56,392 hotel operators are actually right?”

His point is that one could make the argument that most costs are fixed, specifically labor cost, and even though traditionally this cost is perceived as “variable,” i.e. it fluctuates with the rooms sold, the reality is that it does not. In an environment where it’s really hard to find labor, especially housekeepers and front-line service workers, you cannot just vary their hours, because if you cannot offer 40 hours and predictability, they will find an employer who can, and that is often the hotel just down the road. So, owners basically guarantee hours, and that makes the labor component fixed. That in turn means the variable cost of renting the extra room (the marginal cost) is basically zero, which means that a room sold at any rate is basically better than no room sold. That leads hoteliers to just drive occupancy, no matter the ADR.

So, his point was that maybe we have it all wrong, or at the least the wrong way around. It’s not that the high occupancies should drive room rate growth (since we have fewer rooms available) but that the current ADR environment of soft rate growth drives what matters most: high occupancy. When looking at the facts of current ADR trends, it’s hard to argue with his logic.

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.

1 Comment

  • Ginger Sullo July 30, 2019 11:35 AM Reply

    I see what your RE professor friend states as logic- "that the current ADR environment of soft rate growth drives what matters most: high occupancy" however, my point/concern is that soft rate growth will also reduce if not drop NET margins...so aside from fixed (e.g. labor/benefits) costs, and variance in new cust. acquisition costs year-round, in aggregate, soft ADR would be problematic when coupled with reliance of franchise fees/booking transaction fees (even direct booking fees) should this logic become wide spread. Further, this softer ADR growth could further spiral down... given the slowing of our economy's effects on fall/winter room demand. Its a big issue all the way around, especially with labor/utility/RE tax costs continuing their rise...and cutting to the bone (operations) gives no wiggle room to compromised, e.g. cut backs on services.

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