Convention business in San Francisco and healthy demand at luxury and upper-upscale hotels put overall U.S. hotel revenue per available room back in the black for the month.
HENDERSONVILLE, Tennessee—The revenue per available room growth roller-coaster continues, and at least this month the results were not negative but slightly positive.
1. Good, not great
November RevPAR increased 1.3%. In 2019, RevPAR has now increased eight of 11 months (meaning RevPAR decreased in 27% of the months.) ADR was up 1%, which counts as “good performance” these days. Occupancy increased slightly (+0.3%) as 2.4% demand growth outpaced the usual supply increase (+2%). The data was positively impacted by one market: San Francisco hosted the Dreamforce 2019 Salesforce conference (moved from September last year), and that city’s result moved the U.S. data higher by 0.5 percentage points.
The 0.8% RevPAR growth result is much closer to what STR expected for November. Positive ADR growth has now been sub-1% for six out of 11 months, and ADR declined in one month. Yes, November ADR growth was actually 0.99%, so also in the “below 1%” category. Without the 14.2% ADR increase from San Francisco, U.S. ADR growth would have been 0.6%.
2. Do hotel stock investors know something we don’t?
The STR/Baird Stock Index, tracking 20 of the largest publicly traded hotel companies, has seen a healthy rebound from mid-October.
Overall, lodging C-corps and real estate investment trusts have done well this year (+18.3%), but in comparison, the Dow Jones Industrial grew 21% since 7 January. It’s interesting that right before earnings season kicked off (around mid-October) our Stock Index started to rally and has not stopped (so far up almost 13%).
What did companies say or investors hear (not always the same thing) that creates uplift? Maybe just that things are not expected to get materially worse in 2020? Of course, there has been a subtle shift in releases from publicly traded companies, away from stressing RevPAR growth (which is indeed anemic) to reporting on net-unit growth, which is still healthy. The big six publicly traded companies make up 80% of all pipeline rooms. It will be interesting to see if 2020 data bears out today’s investor confidence.
3. Class data
The upper-end hotels did pretty well. RevPAR growth for luxury (+2.6%) and upper upscale (+2.5%) points at healthy group demand.
What is a bit worrisome is that two classes showed ADR declines—with upscale and midscale both down 0.1%. True, those declines are really small, and should be interpreted as “room rates did not change,” but they could also indicate an impending softness in room rate growth across the board. For midscale hotels, STR now reports occupancy and ADR declines, which does not bode well for that segment in 2020.
Counter to the monthly data, the 28-day data through mid-December actually shows some good or very good results, which may bode well for the last month of the year.
4. Pipeline data
The pipeline data really is not moving. The number of rooms in construction now stands at 206,000, up 3.9% from November 2018.
This means it is only 8.5% higher than in January 2017 (when the count stood at 190,000 rooms). Over a span of almost three years, only a net of 16,000 rooms was added to the construction count.
The below chart, showing the implied growth rate of new rooms by class, indicates the strong increase in the number of rooms for upscale and upper midscale will go on unabated, but the growth rates will slow, just because the denominator is increasing.
The luxury segment is going to feel the increase, not on an absolute basis (about 14,000 rooms are not that many, this equates to 39 hotels) but on a relative basis (13% is worth paying attention to if you are exposed in that sector). Given that the construction cycle is elongating because access to construction labor is tight, it is not unreasonable to assume that these luxury rooms will open over the next three years, so the percent increase is a more manageable 3.3% per annum or so. Of the 1,560 economy chain rooms in construction at 46 hotels, 21 are Wyndham brands and 21 are Choice brands.
5. Top 25 markets
First things first, Top 25 markets continue to underperform the U.S. results.
It is not unreasonable to assume this will continue in 2020. Top 25 market RevPAR increased 0.9% in November, compared to 1.3% growth for the total U.S.
As the segmentation data showed, occupancy on the high end was up, and that was mirrored in the larger markets, where demand increased 3.6%, easily outweighing the 2.6% supply increase. Also noteworthy is that the poor ADR growth we have observed in the U.S. overall is now firmly visible in the larger markets. In fact, ADR has now started to decline (-0.1%).
Here are some specific market numbers, sorted by RevPAR growth, high to low:
The top markets in November recorded very strong ADR growth, some group-driven. San Francisco hoteliers are lighting a candle at the altar of Saint (Marc) Benioff, Salesforce founder, for keeping Dreamforce in town.
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.