What does real RevPAR tell us about the state of the U.S. hotel industry and its individual markets? The data does provide some hints as to whether we’re still expanding, doomed for recession or just in recovery.
ATLANTA—How best can we predict the duration of the economic cycle, and by extension, the hotel industry cycle?
Economists look to the National Bureau of Economic Research for business cycle dating, particularly to peg the beginning and ending dates of U.S. recessions. According to the NBER, a complete business cycle has two phases: contraction and expansion. Per the diagram below, an expansion period often follows a completed recovery period.
The line of demarcation between recovery and expansion isn’t always useful for assisting market participants in making capital allocation and other business decisions. The steady growth line in the chart above represents “the growth of the economy when there is no business cycle.” When is that?
A potentially more meaningful delineation of recovery and expansion comes from a 2016 report produced by John Silvia’s economics group at Wells Fargo Securities, which marks the end of recovery and beginning of expansion occurring when real gross national product rises past the pre-recession peak. I’ll use a variant of this definition here to provide a snapshot of U.S. hotel market conditions in the second quarter of 2016.
Hotel market segment recovery and expansion
Real GNP is to the economy as real revenue per available room is to the hotel markets. Hence, market-by-market analysis of real RevPAR metrics from their respective troughs, which intermittently occurred throughout 2009 and 2010 until Q2 2016, conveniently summarizes how far hotel markets progressed through the current cycle.
For the overall U.S. hotel market, the most recent trough reached its deepest level during Q4 2009, when real RevPAR fell to $53.20 from a peak of $81.89 in Q3 2007 (real RevPAR is expressed in constant Q2 2016 dollars). In Q3 2014, real RevPAR reached its highest historical peak and expanded to $86.33 by the end of Q2 2016. The experiences of upper-price and lower-price hotels are as follows:
- Lower-price hotels experienced their previous peak RevPAR in Q3 2007 at $59.60, and their previous trough RevPAR in Q4 2009 at $35.48. Their recovery period started in Q3 2014, and RevPAR as of Q2 2016 was $59.95.
- Upper-price hotels reported their previous peak RevPAR in Q2 2007 at $132.55, and their previous trough RevPAR in Q4 2009 at $90.29. Their recovery period started in Q1 2015, and RevPAR as of Q2 2016 was $135.58.
Note that the lower-price hotels include the STR chain scales of economy, midscale and upper midscale, and that the upper tier includes the chain scales of upscale, upper-upscale and luxury. Independent hotels are not included here. By using the recovery/expansion delineation proposed above, the data indicates expansion among upper-price and lower-price hotels is quite recent. (STR is the parent company of Hotel News Now.)
A detailed look at the chain scale segments along with an independent hotel category is provided in Figure 2. For all of these subdivisions, real RevPARs are expanding, except in the midscale and economy segments, which remain 2% and 3% below their highest historical peaks, respectively.
As shown in Figure 3, some cities have well surpassed the recovery benchmark and are in strong expansion modes.
Real RevPAR during Q2 2016 in both San Francisco and the emerging regional center of Nashville, Tennessee, was more than 30% above both markets’ previous peaks. The real RevPAR of second-tier cities Tucson, Arizona; Newark, New Jersey; and Omaha, Nebraska, as well as Phoenix remain distant from their previous peaks.
Note that energy industry cities Houston and Pittsburgh—and also New York City—reached their respective highest historical real RevPAR peaks and subsequently slid into a contraction or recession state.
The progress of the hotel markets during the past six years through recovery and into expansion appears impressive in the aggregate.
Nevertheless, the midscale and economy segments remain in recovery territory and 23 of the 59 city markets evaluated here have not reached the expansion phase and three are contracting. The range of real RevPAR from 40% above to 30% below previous peaks lends credence to the saying “all hotel markets are local.”
In this report, written nearly eight years since bankers at Lehman Brothers and Bear Stearns walked the Earth, I grade the progress of the U.S. hotel market as a ‘B.’
RevPAR results from the first half of 2016 suggest a pause in proclaiming a universal march toward expansion. Monthly data from STR indicates that six of the top 25 markets in the U.S. recorded nominal declines in RevPAR through June 2016, and another three city markets experienced RevPAR gains at or below the rate of inflation. Concurrently, Los Angeles RevPAR is up 13.7% this year.
The U.S. hotel markets are demonstrating a different sort of income inequality than we are used to hearing about.
Theil, H. (1954). Linear Aggregation of Economic Relations. Amsterdam: North Holland.
Wells Fargo Securities (2016), Predicting the Probability of Recession and Strength of Recovery: An Ordered Probit Approach. Economics Group Special Commentary, June 19.
Bram Gallagher, Ph. D., Economist with CBRE Hotels’ Americas Research, provided valuable assistance in the preparation of this report.
Jack Corgel, Ph. D., is Managing Director of CBRE Hotels’ Americas Research and Professor of Real Estate at the Cornell University School of Hotel Administration.
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