As expected, key performance indicators show the U.S. hotel industry riding out the curve in October. RevPAR increased for the 80th straight month, but at the slowest rate this year.
HENDERSONVILLE, Tennessee—Since last month’s analysis, two unexpected outcomes rocked the world—the Chicago Cubs rebounded from a 3-1 deficit to win the World Series and Donald Trump claimed victory in the United States presidential election. Now we’re all reexamining how we look at odds.
I give the U.S. hotel industry very high odds that we will report prolonged occupancy declines. Does that mean that revenue per available room will decline as well? Well, the odds of that happening are quite small—not null but small—since more average-daily-rate growth is expected.
Here are five things you need to know about how the U.S. hotel industry performed in October 2016, courtesy of STR, HNN’s parent company.
1. Still growing, but at slower rate
RevPAR increased by 1.6% in October, so, yes, we are now in the 80th consecutive month of positive RevPAR. But the growth was anemic—the lowest growth rate this year. Actually it’s the lowest since the rebound month of March 2010 (+3.6%), and I would call this the new normal.
ADR growth was positive (+1.9%), but that was the lowest growth this year. It’s also lower than any month in 2015, or in 2014, and actually the lowest monthly room-rate growth since December 2010. Occupancy declined by 0.3%, which makes October the seventh month of 2016 to report occupancy declines. But positive demand growth in May and September were because of calendar-related shifts (Easter and Jewish holidays), and that really does not speak to any underlying strength. So only June was a true increase in occupancy, and back then it was only a 0.2% increase (ah yes, the good old days)—probably more in line with where the industry really stands.
2. Expenses rising faster
This is the first time this year that ADR increased below 2%. But let’s overlay this with the inflation rate:
So, our data shows that hoteliers’ top-line growth is slowing but that expense growth is increasing. And that means that profit—also often referred to as net operating income or earnings before interest, taxes, depreciation, and amortization—growth is slowing as well. This does not bode well for the future of hotel operators’ stock prices.
Hotel owners also will wonder how to save money for ongoing improvements. I assume all these factors combined may push some owners to put their hotels on the market, take some cash off the table and let someone else ride out this part of the hotel cycle.
3. Riding out the curve
As I said, consecutive RevPAR growth turned 80 months old in October 2016. We expect more growth, but at a very slow pace. As you can see in STR’s new forecast for 2017, we expect that RevPAR will still grow for another few quarters.
4. Weekdays the weakest
Here is a slightly different way to look at this month’s performance to show the inherent weakness of the numbers. I looked at the KPI changes broken out by weekday and weekend, and it is quite striking that that the weekday performance growth is really weak.
At the same time, weekend performance growth is the strongest this year. I interpret this to mean that yes, corporate business demand is weakening. The math goes something like this: Supply growth is 1.7%, and for weekday occupancy to decline 1.6% it implies that weekday demand increased just 0.1%, so basically flat with last year. And it’s not too much of a stretch to assume that weekday demand is business-driven.
Now, I hear what you are saying: the Jewish holidays decreased group demand so the weekday numbers should be poorer. But since we broke another demand record, that means that group demand shifted (to September, probably) but that the individual business traveler were still on the road.
Weekend demand, on the other hand, is driven by you and me spending our own hard-earned dollars, and it is very good to see that the KPIs for weekends are still growing well. The cloud on that horizon is that leisure demand can easily dry up if uncertainty in the economy takes hold. For now, it seems that the U.S. consumer is happy, healthy and terrific—and traveling.
5. Supply drives decline in top 25 markets
Supply growth in the top 25 markets now stands at 2.5%. I expect this number to a) increase as 2017 unfolds and b) have a significant impact in pricing perception in those large markets. And 1% ADR growth might just be a sign of things to come.
Segmentation data for the top 25 markets was weak: Group RevPAR fell by 5.5% and transient RevPAR declined by just 0.1%. Seventeen of these markets registered group RevPAR declines, but only eight of the markets registered transient RevPAR declines. Here are the markets that were hardest hit by the lack of group demand:
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.