December’s U.S. RevPAR increase was primarily rate-driven as ADR and demand growth continued to slow and the number of hotel rooms in construction increased for the third consecutive month.
HENDERSONVILLE, Tennessee—December RevPAR increased 1.9%, driven by ADR growth of 1.8%. And yes, it is December and a slow month anyway, but tepid ADR growth is likely and unfortunately a sign of things to come.
Occupancy has now grown zero-point-something for seven months and declined in two months this year. December ADR growth was second lowest this year. RevPAR and ADR growth were the lowest growth in a December since the upturn started post-2009.
1. More on the KPIs
Hoteliers sold 87.5 million roomnights—of course the highest ever for a December—and 20 million more roomnights than in December 2007, and we thought that things were going really well back then. The demand increase of 1.8 million roomnights when compared to last year is only a 2.1% increase, which is the third-lowest increase in 2018. The three lowest-growth months all happened in the second half of the year. Supply growth in December was 2%, as it has been for the last nine months in a row.
Because supply growth and demand growth are still in slight imbalance in favor of demand growth, occupancy increased to a new December record of a whopping 54.1%, so basically half of the rooms in the U.S. were empty.
Here is an interesting observation: December 2018 saw the highest total occupancy ever, but a lower ADR growth than in any December this up-cycle:
This shows you how much psychology plays into our collective sense of pricing power. When we “feel good,” it’s easier to talk yourself into stronger rate growth than the other way around. And uncertainty seems to be certain these days with obvious implications for pricing conviction.
2. Segmentation data in December
Just as the total U.S. data was weak, so was the RevPAR change for transient (+1.7%) and group (+1.6%). Both segments lost occupancy, but this still means that demand growth was positive, just not positive enough to overcome the supply increases.
ADR growth in the higher classes was actually OK—or what goes for “OK” these days—well over 2%.
All in all, it’s nothing to write home about, but it’s good to see that group rooms that were negotiated a few quarters ago for this December were priced at a healthy increase over December 2017.
Looking at the full-year monthly performance, you can see the clear deterioration in occupancy over the second half of the year for both segments. Transient ADR was slightly higher in the first six months (+2.7%) than the last half (+2.5%). Interestingly, group ADR was actually stronger in the second half (+2.5%) than in the first (+2.1%).
3. Pipeline data
As we have observed in the last three months, the number of rooms in construction has increased, and in December this increase was 6.6% to 192,000 rooms. But I am still not super worried about this increase since the increase seems very manageable.
But, the continued increase in rooms in construction had some clients wondering, so I dug into it and here is what I found:
- In October 2018, rooms in construction increased 6.2% (about 11,000 rooms over October 2017), the first notable uptick in over a year.
- 56% of this can be explained by:
- October 2017: About 2,600 rooms were moved from in construction to other phases because of hurricane impact. Most of these rooms were moved back to in construction over time.
- October 2018: JW Marriott (3,180 rooms) and Edition (600 rooms) in Las Vegas were moved to in construction.
- So, without these 6,380 rooms, the increase in the number of hotel rooms in construction in October would have been about 5,000, or 2.7%, which is much more in line with recent trends.
4. Comments about 2018
“Good, not great.” That is my summary tweet about 2018. Occupancy increased slightly (+0.5%), ADR increased as well (+2.4%) and the sum (+2.9%) came in just below the 3% RevPAR increase we at STR had been expecting for the last six months. (STR is the parent company of Hotel News Now.)
Which actually means, by the way, that we were again awesome at forecasting. A year ago on the Americas Lodging Investment Summit stage, here’s what we and our friends at Tourism Economics said would happen versus what actually happened:
Thank you very much, Tourism Economics. Let’s hope the 2019 forecast is as on the nose.
All KPIs are at their absolute highest level ever. The industry had 1.6 billion roomnights available, sold 1.2 billion of them and generated $163 billion in rooms revenue. And before you get all jolly about selling $163 billion worth of rooms: Amazon sold $177 billion worth of stuff in 2017. Expedia and Booking Holdings together reported around $170 billion in gross bookings in 2017 (globally). If the hotel industry was a metropolitan statistical area, it would *not* rank in the Top 20 in terms of 2017 real GDP. So, everyone loves to talk about travel and hotels (you know I do) and we punch above our weight in terms of media exposure, but as an industry we are really puny.
5. 2018 segmentation data
Just like for the industry overall, it was an “OK” year on the upper end. Occupancy basically did not change, which means that the new rooms developers added were (easily?) absorbed. Pricing was “OK, not great” given the ongoing labor cost increases I talked about last time, which will likely eat up a sizeable chunk (or all) of the rate increases. So RevPAR growth was fine, but hoteliers should not have wished for a Daisy Red Ryder Range Model 1938 Air Rifle BB Gun in Exclusive Retro Box for Christmas that could have shot their eye out, but instead for more ADR growth. Ah well, maybe this year.
Let’s do a quick deep dive into the other categories that we track segmentation data for:
What stands out: Smaller properties and large super-tanker hotels did well. The transient RevPAR decline for hotels with more than 1,000 rooms was driven by an occupancy decline of 3.1%. So that is worth watching. Destination resorts and hotels with spas did well with transient (likely leisure) guests. And groups liked boutique hotels. Although the debate of what makes a “boutique” hotel is as old as Ian Schrager, so I will not get into that here.
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.