US top 25 market segmentation: Choppy waters ahead?
 
US top 25 market segmentation: Choppy waters ahead?
17 SEPTEMBER 2019 8:22 AM

U.S. group and transient hotel segments have performed differently since the Great Recession, and the state of both segments makes forecasting difficult.

HENDERSONVILLE, Tennessee—The STR revenue-per-available-room forecast for 2019 (+1.6%) and 2020 (+1.1%) points at a slowdown in growth for the U.S. hotel industry. (STR is the parent company of Hotel News Now.)

A variety of STR clients are exposed in the larger—what we call “top 25”—markets, and thus those markets are under an extra level of scrutiny from owners, developers, Wall Street analysts and brands. Therefore, it’s worthwhile to examine the interplay of the segmentation data to understand how the top 25 markets fared in the last downturn and what the current performance can tell us about the health of these larger markets.

STR gathers additional demand and revenue data for hotels in the luxury and upper-upscale classes. Specifically, we ask if a room is sold in blocks of 10 or more—what we designate as “group”—or fewer than 10 rooms—designated as “transient.” This additional data set gives deep insights into purchasing and pricing behavior of the larger, higher-end hotels in the larger markets.

When observing the occupancy changes for the segments over time, the sharp impact of the 2009 Great Recession immediately becomes obvious.

Whereas annualized transient occupancy declined 5.9% at the trough of the performance change, the group occupancy decline was much steeper and bottomed out at -18.1%. It is worth noting that the occupancy change for groups already started declining in mid-2006 and was just amplified by the lack of group demand after the recession started in 2007. The dreaded “AIG Effect”—by which resort hotels were basically labeled “taboo” for meeting planners—exacerbated the decline. The lack of a sharp occupancy decline for transient rooms stands out, as does the timing of the decline. Transient room demand declined in the early part of the recession only to rebound back much easier than group occupancy. Annualized transient occupancy crossed the zero percent line eight months prior to group occupancy, potentially pointing at the resilience of transient demand and/or at the much longer booking window for groups.

Most recently, the uptick in new supply growth and demand increases at a rate below that supply level have led to occupancy declines that will likely be hard to reverse if the U.S. economic growth starts to slow.

Average-daily-rate growth changes seems to point a very different picture for the segmentation data in 2009 and 2010.

Transient room rates declined more sharply, dropping -17.1% at its nadir before rebounding but only up to 6.7% growth at peak. Group ADR declined, but did so at a much more measured pace, and we reported an annualized decline of 9%. The rebound was relatively less pronounced as well, and the annual group ADR increase only reached 3.5% in mid-2011. It is also interesting to note that the transient ADR decline started much earlier and at a much sharper pace than on the group side. The question for operators remains: If discounting really works and when looking at the—relatively speaking—less steep decline in transient demand, one could conjecture that indeed the cuts in ADR helped cushion the occupancy fall.

It is not surprising that the group and transient RevPAR declines, even though driven by different factors, were almost equally bad.

After the rebound in performance in the early 2010s, the transient and group RevPAR growth trajectories seem to be headed in one direction: lower.

So, back to the question of discounting: Our data seems to suggest that in an environment of unprecedented economic turmoil, the changes in occupancy and ADR—even if their individual magnitude varied widely—led to a combined RevPAR decline that was basically the same for both segments. So, cutting rates did not seem to cushion RevPAR declines.

2009 vs today
To gain a more detailed understanding of segmentation RevPAR performance, the following charts show the monthly percent change of the top 25 market group and transient RevPAR starting in 2008 and in 2018. The first data set includes the full financial crisis and the recovery in 2010.

It is worth noting that the transient RevPAR decline only preceded the group decline by one month. The sharp declines observed in the 12-month-moving-average data above are of course also visible on the underlying monthly data; group RevPAR suffered more and longer.

Most recently, however, a clear pattern seems to be absent.

It is fair to point out that the changes seem to stay in a band of around +/- 5%, but there seems to be little relationship between RevPAR declines on the transient and group side. Calendar shifts around Easter and the Jewish holidays can cause significant demand and occupancy shift on the group side but are not in itself an indicator it recovery of downturn despite their magnitude. So far in 2019, transient RevPAR has declined in five of seven months, and group RevPAR has declined in four of seven months.

Demand shares stay roughly the same
Given the changes in the U.S. hotel industry with regards to supply growth and booking behavior, we also looked at the demand share generated in the top 25 markets. Interestingly, over the last nine years little to no movement can be observed. Group’s and transient’s shares of roomnights sold in higher-end hotels in the top 25 markets has stayed basically the same:

So, basically more than 50% of all transient and group rooms are sold in the larger markets, which in itself is probably not a surprise. There seems to be a very slight increase in the ratio of transient room demand in the top 25 markets, but it is hard to assign any real significance to an 80-basis-point shift.

Conclusion
The top 25 markets matter to total U.S. performance. Especially for the high end of the hotel classes, the group and transient demand and ADR change has significant impact on the national numbers. In the last downturn, group room demand and transient ADR were hit disproportionately, but it is remarkable how swift the recovery was. Our most current data set is hard to parse since the changes seem to follow no discernable pattern. We will continue to report on the segmentation demand in the top 25 markets to show noteworthy trends that may impact the U.S. data.

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

  • Del Ross September 19, 2019 7:33 AM Reply

    Group pickup rates are a good predictor of an overall downturn. We have received multiple reports of lower pickup rates throughout this year just in conversation with our management company clients. Perhaps HNN, STR and CVent could collaborate to examine this further and see what pickup rates are telling us today?

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