US hotels show slight uptick in May
US hotels show slight uptick in May
30 JUNE 2020 8:05 AM

The U.S. hotel industry saw only a slight improvement in May compared to the record lows set in April.

SALISBURY, Connecticut—States reopened, weekend occupancy soared and now COVID-19 numbers spike. More cases could impact business and group travel in H2. For now, we look at May and are grateful that the worst seems to behind us.

1. US RevPAR decreases have been worse
May RevPAR declined 71%, the second-steepest decline ever. The only positive about that number is that it is not 80% as we had reported in April. But that is about it.

Source: STR, © 2020 CoStar Realty Information, Inc.

And the weekly data is actually also showing results of better than 70% decreases.

Source: STR, © 2020 CoStar Realty Information, Inc.

But let’s be clear, the number of COVID-19 cases is not decelerating. In some places it is actually accelerating, so the implications for the U.S. economy and the travel economy are less than clear. When the dust settles, will we need to acknowledge the fact that welcoming leisure travelers to beach resorts and bars in May without social distancing contributed to an increase in cases? And will the implication be then that some larger cities do not open up fully for a while, and then continue to restrict gatherings, hence further stymieing the group recovery? And will an increase in cases make CEOs more skittish about sending their teams back on the road?

One scenario to consider is that the current uptick in leisure demand will eventually run out of gas as COVID-19 cases surge and the summer season ends without corporate demand taking the place of leisure travelers. That would be the downside scenario.

2. New revised forecast
We revised our RevPAR forecast from a 57% decrease to down 50%, so a (very) slight improvement. Part of it is a revision in the demand decline to down “only” 36.2% based on the April and May data. Let’s see if that holds.

Source: STR, © 2020 CoStar Realty Information, Inc.

I laid out the possible downside scenario earlier. Let’s revisit the U.S. forecast after the June data comes out and we have a better handle on rooms sold and COVID-19 cases observed.

3. Class data
The national supply decline is, not surprisingly, driven by the temporary closures at the high end.

Source: STR, © 2020 CoStar Realty Information, Inc.

Almost half of all luxury hotel rooms were offline and a third of all larger upper-upscale hotels were as well. So, this implies that you need to take the occupancies on the high end with a grain of salt (or a Vesper Martini, your choice) since they are—just the like the U.S. numbers—overstated when taking full supply into consideration.

Until group demand returns, we expect the lowest occupancy and highest RevPAR declines in upper-upscale hotels. On the other side of the ADR spectrum, economy hotels are almost half full and June weekly data shows as much.

Source: STR, © 2020 CoStar Realty Information, Inc.

4. ADR premiums
In May of last year, the ADR difference between upper upscale and economy was roughly $120.

Source: STR, © 2020 CoStar Realty Information, Inc.

Luxury ADRs stood in a class of their own, with a $100 premium above Upper Upscale. Fast forward to today:

Source: STR, © 2020 CoStar Realty Information, Inc.

The ADR difference between luxury and economy now is $120. Well, roughly. Have another martini, and it works out just fine. A couple of things to note: Luxury ADR declined over $100, but the contraction in ADR range then allows consumers to trade up during summer vacation. This could provide a much-needed boost for the upper-upscale segment.

Case in point: Last year $118 bought you a nice—but probably not overly fancy—room in your favorite upper-midscale hotel. This May $118 gave you access to an upper-upscale hotel—likely with a closed pool, a closed spa, a closed ballroom, no restaurant service, and optional housekeeping; but still. Consumers are not looking at the world through the class data lens like us nerds and simply think about a travel budget. And if that that travel budget allows for a higher-end hotel, that will be the choice.

The issue with this contraction in ADR is, of course, that the competitive landscape has shifted and now hotels that used to be much higher or lower on the ADR scale are competing for the same customer. It will be interesting to observe what drives the ADR premiums again—and when.

5. Pipeline data
As expected, the number of rooms in construction (I/C) declined for the first time in a long time to 217,000 rooms. That is 3,000 rooms fewer than last month, and I would fully expect this trend to continue from here on in as the rooms that are opening are not being “backfilled” by projects in the final planning phase.

Source: STR, © 2020 CoStar Realty Information, Inc.

What surprised me in the data this month is that there were no new projects that were marked “abandoned.” Yes, another 13 projects were deferred (and let’s face it, they may never make it) but we counted zero projects that were stopped completely.

Source: STR, © 2020 CoStar Realty Information, Inc.

Part of this is the issue that we get inundated with news releases when hotels break ground and owners sign up a flag, but no one takes the time to email us when their projects go to the great hotel in the sky, bye bye. So, this “zero” count in May is probably an understatement of the reality that a many more marginal projects will not make it. We may just learn about it with some delay.

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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