Analysis of performance data for the top 25 U.S. hotel markets shows a clear correlation between supply growth and RevPAR declines.
BROOMFIELD, Colorado—Supply growth in the U.S. hotel industry continues to increase throughout the country. During the past several years, healthy demand growth has been able to mitigate the majority of the impact of all the new supply. However, as we’ve seen more recently, occupancies in key markets are beginning to decline.
May year-to-date data shows that 15 of the top 25 markets are experiencing occupancy declines. Seven of these markets are also seeing declines in revenue per available room year to date. New York City and New Orleans also show declines in RevPAR, but have positive occupancy growth despite declines in average rates.
All of these markets are still experiencing year-to-date demand increases with the exception of Dallas and San Francisco—Houston demand is actually up. As we know, the real issue in these markets is the supply growth. Nine of these same markets, including New York, have supply growth of 3% or greater.
In examining the performance of these markets, there does seem to be a clear correlation between supply growth and declining RevPAR. If we observe all of the 165 U.S. markets for the past 18 months, we can quickly see the effect of new supply on RevPAR.
Each mark represents market performance for the trailing 12 months. July 2016 for North Dakota—highlighted in the above chart—is a clear outlier due to the declining demand from the oil and gas industry at that time. For the most part, the markets show a clear decline in RevPAR as supply growth increases. The critical threshold here is 3.4% growth in new supply. This is where RevPAR begins to decline, based on the modeled trend line shown.
Similarly, in comparing occupancy growth to supply growth, we see this critical threshold at 1.8% supply growth. So then, at 1.8% supply growth, occupancy begins to decline, and at 3.4% supply growth, RevPAR begins to decline. This implies an inherent 1.6% growth in average daily rate for strong supply growth markets. Without any supply growth, RevPAR growth is 6.7% and occupancy growth is 2.3%, which indicates a 4.4% inherent ADR growth rate for more stabilized markets.
This relationship is constantly changing, however. If we expand our analysis to three years of data or five years, we see a much higher critical threshold. Of course, three to five years ago we were still in a recovery, and demand growth was especially strong no matter how much new supply was added to a market. This analysis isn’t predictive, as you can see the data does not easily conform to the model and the correlation isn’t particularly strong. However, at this particular time in the hotel industry cycle, the model does seem to make sense as you compare it to the performance of the fastest-growing markets in the top 25.
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.