US February data heralds San Francisco’s return
US February data heralds San Francisco’s return
29 MARCH 2019 8:18 AM

U.S. hotels’ February RevPAR growth was the strongest since October, and two markets—San Francisco and Atlanta—posted significant performance increases during the month.

1. Performance was par for the course
February revenue per available room increased 2.6%, the strongest growth rate since October 2018. Occupancy growth was basically flat (+0.7%) and ADR growth—after January’s abysmal 0.8% increase—was an OK 1.9% increase.

Occupancy change has now been zero-point-something for five months running and average ADR growth over those five months is 1.7%. Yes, that’s dragged down by January, but doesn’t inspire much confidence either way.

And behold, supply growth is now 2.1%, the highest supply growth rate since the end of the dark days of the Great Financial Crisis (GFC – I had not actually heard of that abbreviation until this month, I always just called it the Great Recession, silly me) – so around mid-2010.

Here is an interesting stat that maybe is only interesting to me: duration of supply change broken out by percent in this up-cycle, which started in 2011:
Isn’t it fascinating that the U.S. hotel industry actually had supply growth of less than 1% for almost five years? Of course, this cannot last, and it did not. But just a reminder, we forecast supply growth this year at 1.9%, so actually expect that the supply growth will slow slightly. But... but…how is that possible when we suggest that the pipeline is actually increasing? Well, the supply change is a function of the existing supply, and as that grows the percent change—even with larger new hotel counts—will decline because the base is higher.
2. Segmentation data
For the upper end of the STR class spectrum, group rooms matter—a lot. As in “one-in-three rooms” a lot. So when groups perform well, there is a collective smile on revenue managers’ faces. And keep in mind that the big boxes that report segmentation data to us had to absorb supply increase in excess of the national 2% growth, so any increases in occupancies imply very healthy demand increases. For February, all is well that ends well. (STR is the parent company of Hotel News Now.)
Group hotels had a monster month as ADR increased 4.5%, and here is some more color on the ADR increase by a few subgroupings we track:
So if you were a luxury hotel with more than 1,000 rooms and had a spa or considered yourself boutique, then you negotiated your group room increase well a year ago. It also helped if you were located in Atlanta (see below).
3. Top 25 markets
Let me just put this up front: 2019 is the year of San Francisco. February RevPAR by the Bay was up 28.4%, driven up by a 23.4% ADR increase. And this is, check it out, an ADR increase on top of last year’s not really cheap ADR of $209 (to now $258). So, George Moscone, 37th mayor of San Francisco—who served from January 1976 until his assassination in November 1978—will from now on be known as the patron saint of successful convention center renovations; since the Moscone reopened the San Francisco hotel industry has been on fire. Fun fact: Moscone's first year as mayor was spent preventing the San Francisco Giants professional baseball team from moving to Toronto.

And how impactful is the San Francisco performance? It lifted the overall U.S. ADR and RevPAR numbers substantially:
Basically the city provided a 30% lift to national ADR (50 basis points on 1.4%) and RevPAR (60 basis points on 2%) change. Wow.

But, you ask, how come San Francisco gets all the accolades and Atlanta’s RevPAR increase was an equally—or more—impressive 33.1%? The answer: Super Bowl. Whereas Moscone is open forever and ever, amen, and will not move locations—barring any unfortunate San Andreas fault “incidents”—the NFL moves their main game ‘round and ‘round.

While Atlanta’s 28.6% ADR increase was impressive, next year it will be, well, not impressive. Exhibit A, your honor: Minneapolis RevPAR was down 36.8%, driven down by a 30.9% ADR loss and an 8.9% occupancy loss. Similar results will be seen in Atlanta in 2020. You heard it here first.

Following on the strong group ADR theme, the U.S. top 25 markets had actually a good ADR growth month (+2.3%), but because supply growth is now 2.7%, it’s really hard to grow occupancy. Room demand increased a little (+1.3%), but that was not enough to stem the tide and occupancy declined (-1.3%). Ten markets recorded RevPAR declines, so more markets did well. But only eight of them grew RevPAR more than 2%, specifically:
4. Top 25 Segmentation data 
Since the U.S. segmentation data was pretty conclusive, the top 25 data is not surprising:
What is good to see is that the transient ADR change is actually quite healthy; it shows pricing conviction on the basis of relative healthy occupancies. Let’s see if that lasts. We are indeed wondering the same about group ADR growth.

A total of 13 markets saw declines in transient RevPAR, and 11 markets recorded a decline in group RevPAR. Here is who did well:
It’s a bit rare to see the markets with very strong group RevPAR increases also increase transient RevPAR strongly at the same time. Normally one outweighs the other, and group attendees displace transient travelers and transient ADR growth. But for Super Bowl markets that is of course not true. And then there is San Francisco, where this pattern could be true for a few months until the performance has leveled off at a new, much higher level.

And speaking of Super Bowl group impact, here is a quick history lesson. We are examining the February group ADR in the year before, during, and after the Super Bowl:
And here are the corresponding percent changes in group ADR:
This one-time event skews the data heavily for the host city and impacts the full year and the next year percent changes. Outside of that blip, the ADR group rate increase over two years is much more in line with expected values. Well, there is always San Francisco. Also, when I look at where Miami group rates are without the Super Bowl, I wonder if next year we will see group ADR top $400 for the first time ever in a Super Bowl host city.

5. 12-month moving averages
Through February, the 12 month moving average results continue to come in the same way as before: OK, but uninspiring. 12MMA RevPAR growth is 2.8%, because even nine years onto the up-cycle we still somehow, somewhere find new travelers and demand is up 2.4%. Supply growth will be around 2%, even though the February data point sat an uptick, we still think the year-end number will come in at 1.9% growth. ADR growth is what it is, which is not much.

So, interesting development on the segmentation side after the February data came out. Group ADR growth is higher than transient ADR growth.
On the long-run trend, the data looks like this:
So here why this should give us pause: The group ADR is only the materialized reality of negotiations that took place a year or six quarters ago. Back then, looking forward at spring 2019, revenue and sales managers felt pretty good about their situation and estimated that hotels would be full, so they could charge higher rates with conviction.

Now, fast forward to two months or even four weeks ago. Looking forward, again to the same point in time, spring 2019, revenue and sales managers are now facing more uncertainty than they did before, and with occupancies softening on the upper upscale side, pricing conviction seems to have waned. So, the transient ADR growth curve is flattening, and we are now in this odd time period where group ADR is growing faster than transient rates.

The implication here is clear—if this continues, then group rate growth going forward will be depressed, since group rates for later this year and next year are negotiated today, in a time of uncertainty. Now, one month does not a trend make, as we like to say, but still, this is definitely worth watching!

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.

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