What market RevPAR says about the state of the cycle
 
What market RevPAR says about the state of the cycle
10 AUGUST 2016 8:07 AM

How can anyone accurately predict when the U.S. economy’s downturn will begin? Looking at the pattern of market-specific RevPAR changes from previous cycles could provide some clues.

BROOMFIELD, COLORADO—The one question that always irks me at conference sessions is the ubiquitous “What inning are we in?” This generally leads to meaningless prognostications or wishy-washy nonanswers. After all, who really wants to predict an industry or economy downturn?

As I heard one panelist at the recent ALIS Summer Update respond: the economy does not follow a strict timeline. There is no scheduled beginning and end, and there is no limit to how long positive growth can last.

Nevertheless, there are dynamics in some hotel markets which are causing declines in revenue per available room: low oil prices, Zika fears, a weakened Canadian dollar, and—in a couple of cases—significant increases to supply. But at what point do all of those factors affect the greater industry?

How RevPAR changed over time
Looking at market-level data, we examined the history of RevPAR changes. The area chart below categorizes all 164 U.S. hotel markets by their trailing 12-month RevPAR change since 1989.

To no surprise, the trend resembles the overall RevPAR change for the U.S. lodging industry. This also shows one of the most intriguing data points we’ve seen in this cycle. In February 2015, no markets experienced a RevPAR decline on a trailing 12-month basis. That is the only point over the past 27-plus years when that has occurred. This occurred exactly five years after the worst month on the chart when only one market—North Dakota—experienced a RevPAR gain.

What tips the scale?
On the flip side, we hoped to discover a tipping point to indicate when market-level declines are more than simply a result of localized nuances. Obviously, when roughly half the markets show RevPAR declines, the overall U.S. metric is negative.

However, looking at the last three downward cycles, once more than 48 markets (29.3% of the 164 U.S. markets) showed trailing 12-month RevPAR declines at the same point in time, the downward spiral had begun. What’s more, when the number of markets exhibiting a decline in RevPAR increased by 10 markets or more on a month-over-month basis, it indicated a downward momentum shift that would spread to more markets. In both cases, these occurrences preceded a RevPAR decline for the overall U.S. lodging industry by at least a couple of months.

Applying the analysis
In order to determine where the industry stands today, currently 25 hotel markets are showing RevPAR declines on a trailing 12-month basis through June 2016. This is well below the 48-market threshold, and even below the strong growth period from 1997 until 2000 which fluctuated between 33 and 43 markets with RevPAR declines.

Of the current markets with declining RevPAR, 19 rely on roomnight demand from the oil and gas industry. New supply is hurting a couple of markets as well, particularly New York. The weakened Canadian dollar and Zika fears also appear to be affecting a couple of locations. And based on this analysis, the number of markets affected by these various issues would need to almost double in order for the RevPAR declines to be a concern for the greater industry.

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1 Comment

  • Robert Rauch August 10, 2016 5:28 PM Reply

    Great job of helping us avoid the fear that works to undermine ADR growth. I maintain that the rest of this year will be fine and when we hit a soft patch in 2017 due to supply, terror, international sluggishness or the result of this crazy U.S. politics, we will come in for a soft landing.

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