HENDERSONVILLE, Tennessee—In some ways, the Cleveland, Ohio, hotel market reflects the overall Cleveland economy and the challenges it has faced in recent years.
The city’s 191 hotels and 22,000 rooms rank the market No. 50 in the U.S., generating US$351 million in annual room revenue. As with most U.S. markets, the recent downturn slammed Cleveland; but unlike many markets, the city’s hotel industry challenges began in the late ‘90s with a stretch of significant supply growth that resulted in eight consecutive years of occupancy decreases.
Recent performance
Let’s take a look at Cleveland’s recent performance. Room supply contracted 1% during the first seven months of 2010, while demand (roomnights sold) increased 8.8%, pushing occupancy up almost 10% to 54.3%. At the same time, average daily rate fell 3.2% to US$83.17. The combination of higher occupancy and declining ADR resulted in revenue per available room growth of 6.4%.
Click chart to enlarge.
Click chart to enlarge.
Monthly occupancy in the market has enjoyed good increases since December 2009, but ADR has fallen every month since February 2009. Although the ADR decreases are slowing, it does not appear the market will see growth until later this year.
Smith Travel Research segments the Cleveland market into four sub-markets. The central business district (CBD) and Beachwood areas account for slightly more than 64% of the market’s annual room revenue and enjoy significant ADR premiums over the Westlake and Outlying Areas sub-markets. July 2010 trailing 12 month occupancy in all four sub-markets was less than 60%—but more on that later.
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Nearly one-half of Cleveland’s annual room revenue is generated by upper upscale and upscale properties, with another 17% from midscale-without-food- and-beverage hotels. Cleveland is a chain-dominated market—about 90% of room revenue in the market comes from chain affiliated properties.
Transient and group performance at upper-end hotels (luxury and upper-upscale chains and upper-tier independents) also provides perspective on how the market is recovering. July 2010 year-to-date transient occupancy was up more than 16%, and group increased 2.5% versus the same period 2009. Transient ADR was down about 4% and group fell about 5% during that same time period. Comparing the transient and group numbers against July 2007 (the year before the downturn) reveals that group occupancy was off by more than 17% and transient was down about 3%. Group ADR had a 4.6% deficit while transient ADR was down almost 12% from 2007 July year-to-date performance.
Click chart to enlarge.
Click chart to enlarge.
Sunk by supply
Cleveland’s total market occupancy levels have not reached 60% since 2000. Though the point is debatable, the seeds for the market’s relatively low occupancy levels may well have been sown between 1995 and 2003. During that period, annual supply growth averaged 3.4%—well more than the 20-year average of 1.9%. Average annual demand increased 0.8%, which resulted in annual occupancy decreases during eight out of the nine years.
Cleveland will clearly face challenges moving forward. There are currently 307 rooms under construction—about 1.4% of existing supply. A 1.4% supply increase would be less than the long-term annual average of 1.9% but would still be challenging for a market running annual occupancies well less than 60%. However, keep in mind that more than 50% of Cleveland’s hotel room supply is 20-years-old or older and some existing supply may well be obsolete.
Only time will tell how quickly Cleveland’s hotel industry recovers from the great recession. Although improvements will likely continue, market-wide occupancies may face pressure for some time. However, look for savvy Cleveland hoteliers to weather the storm by delivering great value and service to their guests as the market stabilizes.
