Freitag’s 5: Major events define US August performance
Freitag’s 5: Major events define US August performance
28 SEPTEMBER 2017 9:20 AM

The U.S. hotel industry’s key metrics in August benefited from the demand boosts generated by the solar eclipse and preparations for Hurricane Harvey. But inspection of group, transient and top 25 market performance reveals some cracks.

HENDERSONVILLE, Tennessee—U.S. results in August were mixed and toward the end of the month affected by two events, the solar eclipse and Hurricane Harvey.

We are watching the developing hurricane season for further impact on performance results and the pipeline numbers in the affected markets.

1. KPIs, demand up in August
Total U.S. revenue per available room grew 2.5%, driven up by a 1.6% increase in average daily rate and 0.9% occupancy growth. So this is the 90th consecutive month of RevPAR growth, and we expect more growth going forward but through some choppy waters.

For the month, the hotel industry sold more than 113 million roomnights, which is 3 million more than August 2016. Demand growth was a healthy 2.8%. Not the best this year, not the worst, but definitely a bit higher than I had expected.

So, the state of Texas added 300 basis points in room demand to the total U.S. numbers. Of course, only the last few days in Texas were affected by the influx of displaced people and hurricane aid workers, so it will be interesting to see how September results are skewed by the Texas data.

2. Group performance falls
Group occupancy took a hit (-4.7%) and transient occupancy was up a modest 1.2%, which points at supply growth and stagnant group demand for the higher-end hotels. ADR growth was minimal for both segments (transient +0.7%, group +0.9%). I guess we can blame that on August not being a business travel month and both segments being more leisure-dependent.

Then again, let’s look at history:

Indeed, this year was much weaker than historically observed. The group ADR increase in August used to be more than 3%; now it is below 1%. Yes, this could all be an outlier. Or is it?

Transient ADR is clearly on a downward trajectory, but that is something we have discussed and not a surprise. Still, growth below 1% is certainly worrisome.

Group ADR growth is at its lowest level since January 2012. In the last five years, there has never been a month where group ADR percent change was this low. Is this a sign of things to come? Let’s hope not.

3. Midscale, economy hotels shine
Lower-end classes outperformed the rest of the U.S., driving up RevPAR with ADR growth higher than 2%. Occupancy increased across the board, except for upper-upscale class hotels, where demand only increased 1.6%, but supply increased 1.7%.

As I said before, we expect that occupancy growth will be muted for the remainder of the year. It is possible, however, that the hurricane impact will push demand numbers up a bit—especially on the lower end—which would lead to more sustained occupancy growth figures for longer than we had thought at the beginning of 2017.

Demand growth so far has been very healthy in the middle segments, with upscale and upper-midscale hotels increasing their rooms sold at a very healthy rate—around 5%.

It is worth pointing out that four of the six classes reported occupancies higher than 70%, so they each have basically very full hotels, aided by strong transient leisure demand.

4. Rooms in construction up, but that could change
The number of rooms in construction increased by 13% to 192,000 rooms. This was a bit higher than last month (189,000) and thus it is a change in the momentum we had observed this summer, when rooms in construction decreased sequentially.

That said, the absolute value is still below the February figure of 194,000 rooms in construction. So it looks like construction numbers are taking a bit of a breather.

One interesting way to look at this is to observe the growth rates month to month and year over year.

So, sequentially some pipeline phases actually declined, and rooms in the planning phase when compared to August 2016 only grew 2.1%. This could bode well for a reasonable supply increase going forward.

The other topic we are watching closely is that the hurricanes will likely affect properties in construction. It is possible that the affected properties will face considerable setbacks as the receding waters make way for mold and force contractors to rip up drywall in half-finished buildings.

What could further delay construction is the lack of availability of labor, as construction crews focus on opening closed properties before getting to work to build new hotels. In addition, it is probably not a stretch to assume that materials such as lumber, drywall, concrete and steel will be hard to come by, and thus become more expensive.

Our pipeline team is researching the state of projects, but we likely won’t be able to fully assess the damage in Texas and Florida until 10 October—when we see the brand feeds.

5. Top 25 markets losing pricing power?
Oh look, occupancy in the top 25 markets declined again, this time by 0.3%. Supply growth continues at around the 2.5% pace that we have seen in the past. I would not call the August’s 2.3% growth rate a slowdown just yet—it’s just a month.

Pricing was, again, a soft spot. ADR increased only 0.7%, after 0.6% in July. So far this year, ADR growth in the top 25 markets has really slowed, as shown here:

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.

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