Past downturns indicate resilience of drive-to demand
Past downturns indicate resilience of drive-to demand
26 JUNE 2020 7:48 AM

Hotel performance in markets within driving range of central business districts either declined more slowly or recovered more quickly following downturns in 2001 and 2008, STR data shows.

HENDERSONVILLE, Tennessee—Almost from the moment a downturn is identified, “recovery” becomes a topic du jour, from when it will happen to what markets or hotel types will bounce back first.

Many industry analysts have bet on “drive-to markets” as the first to recover due to the relatively lower cost of travel. While the current downturn does have economic implications, it is at its core health-based, and recovery hinges on avoiding small, enclosed spaces like airplanes, thus leading to further buzz around drive-to markets.

STR, parent company of Hotel News Now, set out to define this somewhat amorphous term and then determine whether drive-to markets are, in fact, first to recover post-downturn. For this analysis, we’ve defined drive-to markets using distance to 60 top central business districts nationwide.

Hotels 50 to 200 miles from a CBD—which include secondary and tertiary markets such as San Luis Obispo, California; and Hilton Head Island, South Carolina—are drive-to markets, while hotels less than 50 miles from a CBD are not. Below we compare performance of hotels in these driving destinations to performance of centrally located city hotels.

CBD hotels hit harder year-over-year
The past two downturns began in September, suggesting the following springs should mark the return of leisure travel, theoretically to driving-distance destinations.

Looking at the first six months of 2002, hotels within 50 miles of a CBD suffered the largest losses in occupancy, average daily rate and revenue per available room.

Supply growth is not (entirely) to blame for such poor performance. While hotel supply growth within 50 miles of a CBD was higher than supply growth in the other three buckets, demand for the city-centered hotels declined 2.4% year-over-year. Demand grew between 1.1% and 2.4% for hotels spaced between 50 and 200 miles from CBDs, which helped offset supply growth and allowed for some pricing power.

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

Hotel performance in 2009 tells a similar story. CBD-adjacent hotel key performance indexes fell significantly more than KPIs of their more distant cousins. Drilling down a little deeper, CBD-central hotels had the lowest supply growth and the greatest demand decline of the four distance bins, suggesting that travel out of cities and into secondary and tertiary destinations increased.

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

Interestingly, while occupancy and RevPAR performance improved marginally as distance from CBDs grew, ADR declined almost identically for hotels 50 to 200 miles outside city centers.

Recovery time can vary by downturn
To measure recovery another way, we indexed rolling 12-month demand to the event month—in this case, the 9/11 terrorist attacks in September 2001, and the Lehman Brothers bankruptcy filing in September 2008. Looking ahead 12 months, the data shows which hotel set, based on distance from the CBD, recovered demand the fastest.

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

Following the 9/11 terrorist attacks, demand for centrally-located hotels within 50 miles of a CBD fell significantly more than demand for hotels more than 50 miles from a CBD. Hotels located 100 to 149 miles away from city centers recovered the fastest, reaching pre-event demand levels seven months post-terrorist attacks.

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

The effects of the Great Financial Crisis in 2008 were significantly more profound, and hotels did not show demand recovery in the 12 months post-bankruptcy regardless of location. Drive-to market hotel demand declined at a slower rate than CBD hotel demand did, but hotels outside of city centers were not immune to the impacts of the financial crisis.

The difference in post-event performance in 2001 and 2008 could be attributed to the nature of the events. The 9/11 attacks led to travel declines due to safety concerns, and the stress of the situation tipped a slowing economy into a brief recession. Drive-to markets performed well in this instance, as travelers sought safety in driving, rather than flying, to destinations.

Conversely, in 2008 an asset price bubble popped, revealing deep cracks in the economy and jumpstarting one of the worst recessions since the Great Depression. Economic decline depressed travel, and while drive-to market hotels fared better than city-center hotels, recovery was much slower for all hotels.

Neither event truly captures the scope of the current crisis, but taking from 9/11 the idea that driving may be the safer mode of travel, and from 2008 that non-city destinations may be the less expensive destination, we can extrapolate that drive-to markets may come back quickest once travel resumes.

Kelsey Fenerty is a research analyst at STR. Jan Freitag is 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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