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‘Tale of two recoveries’ still rings true
June 13 2013

The U.S. hotel industry is still bifurcated. While the top 25 markets post record returns, hoteliers throughout the rest of the country still face challenges.

Highlights
  • Recovery in many secondary and tertiary markets has been slow to come by.
  • The top 25 U.S. hotel markets posted occupancies of 68.3% year to date, while all other markets were at 55%.
  • Oversupply is the biggest challenge facing Chandler Thayer at RHW Management.

REPORT FROM THE U.S.—Ken Edwards is seeing recovery in the secondary and tertiary markets in which he owns and operates. But the pace of progress is slower than he would like.

Whereas in the past economic growth roared back with increases of 3% to 4%, recent expansion has trudged along at 1% to 1.5%, he said.

“I believe that the secondary markets, the economy will continue to grow. The problem is the economic growth is small. They’re experiencing growth, but it’s just the growth the economy is experiencing,” said Edwards, managing partner for Tristar Hotel Group, which manages 15 hotels, in which Edwards has a personal ownership stake in five.

In short: “Secondary markets are still struggling,” he said.

The oft-cited “tale of two recoveries” is proving true throughout much of the U.S. hotel industry, according to sources and data from STR, parent company of HotelNewsNow.com. While major metropolitans are thriving, markets in suburbia and along isolated interstates are finding demand more difficult to come by.

Through the first four months of the year, the largest 25 U.S. markets saw increases in occupancy, average daily rate and revenue per available room to the tune of 2.9%, 5.2% and 8.2%, respectively.

Jan Freitag
STR

 

All other markets posted an occupancy increase of only 1.9%, ADR growth of 3.6% and a RevPAR gain of 5.6%.

The discrepancies are more pronounced on an absolute basis. The top 25 markets had an ADR premium of $36.82 over all other markets and a RevPAR delta of $37.77.

The top 25 posted occupancy of 68.3% through April, according to STR. The rest of the country? Only 55%.

“That to me is the driver of the economics underlying this tale of two recoveries. If all the rooms are empty, you have no pricing power,” said Jan Freitag, senior VP of global development for STR.

Under demolished
“There was a time when we were very relieved when we were located where we were located,” said Chandler Thayer, COO of RHW Management, which manages 17 hotels in Colorado, Kansas, Nebraska and Arizona.

When the global downturn first materialized, the New Yorks of the world fell first, while secondary and tertiary markets largely were insulated, she said. “It was just a matter of time before Middle America started feeling the effect.”

Years later, recovery is being suffocated in many of those markets by oversupply, Thayer said. Many hotels that were planned during the heady days of 2007 opened during the depths of the downturn.

And much of the older, tired hotel stock is not exiting the market as one might expect.

 “We’re under demolished,” Freitag said. “We need to get rid of some of that hotel stock. The problem is there aren’t a whole lot of other uses for those parcels.”

Apartments used to be the go-to conversion route, but that sector is experiencing problems of its own, he continued. Besides, many owners can still operate profitably when only selling half their rooms.

“I’m making it sound like 55% occupancy is bad. It’s not,” Freitag said. “You can absolutely make money at the property if you’re running at 55%. It just depends on your debt service.”

Exceptions to the rule
“It’s hit and miss with our markets,” Thayer said of recovery. “We have throughout the last few years seen some experience a recovery faster than others.”

Chandler Thayer
RHW Management

 

Edwards said his hotels located in university markets have performed exceptionally well.

“The university markets, they never sort of volleyed. Even during 2008, 2009 and 2010 we found those markets to be stable,” he said.

He also said many government markets have done well, although the sequestration has dampened those effects slightly.

The government cutbacks have had a more negative impact in Colorado Springs, Colorado, where RHW Management operates seven of its 17 hotels, Thayer said, adding she is still optimistic for the long term. It’s a sentiment she shares for recovery throughout Middle America.

“Do we see the opportunity for things to improve? Everything we read obviously leads us to believe that business travel continues to improve, leisure travel is on the rise,” she said.

“We’re hopeful it will recover. We have revenues as a whole coming up to levels that we are comparative to successful years of the past.”

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