What submarket performance says about the industry
What submarket performance says about the industry
06 SEPTEMBER 2016 7:31 AM

Readers have asked for a further breakdown of market RevPAR analysis, so here’s what the RevPAR performance of 638 U.S. submarkets says about the health of the cycle.

BROOMFIELD, Colorado—After our analysis of the market-level revenue-per-available-room performance last month, we received numerous inquiries about dissecting RevPAR shifts even further to home in on an early warning signal for the next downturn.

While the submarket changes show more granularity, they also have more nuances that may or may not resemble the dynamics in their greater market areas. By sifting through the 638 U.S. submarkets, the intricacies of submarkets and their varied relationships to their respective markets comes to light.

In our analysis of market-level RevPAR, we discovered that once 29.3% of markets exhibited RevPAR declines on the trailing 12-month basis, a recessionary slide was underway.

However, at the submarket level, the tipping point was a bit higher. In the prior downturns, it wasn’t until 35.3% of all submarkets (225 tracts) experienced declines that an economic slowdown was certain. Also, as the prior three down cycles gained momentum, there was a month-over-month acceleration in declines that added more than 24 submarkets to the volume of shrinking RevPAR. The chart below illustrates the history of submarket-level RevPAR changes since 1989 along with the tipping point indicator.

In January 2015, 617 submarkets experienced RevPAR growth over the trailing 12-month period, which was a record for the industry. This actually occurred one month prior to all 164 markets seeing RevPAR growth (615 submarkets showed increases through February 2015). So even though 25 submarkets had RevPAR declines last February, each market overall displayed growth.

And here’s another example of the strength of the current cycle: Over the seventh-month period from November 2014 through May 2015, more than 95% of U.S. submarkets (more than 606 tracts) boasted RevPAR growth each month, the only points over the past 27 years when growth was that pervasive.

Conversely, the previous downturn contained an eight-month stretch from September 2009 through April 2010 where more than 95% of U.S. submarkets had diminishing RevPAR. At its worst, 618 submarkets (96.9%) had declines. This was a much bigger decline than either of the previous market troughs. In 2002, 470 submarkets reported RevPAR declines, while in 1991, a total of 371 submarkets were in retreat.

Current submarket RevPAR litmus test
Through July 2016, 120 submarkets have weakening RevPAR over the past twelve months. Nearly half of those submarkets have some level of dependency on the oil and gas industry. Supply growth, particularly in the Manhattan, New York; Austin, Texas; Chicago and Miami Beach, Florida, submarkets, account for another 10% of the submarket declines. The strength of the U.S. dollar is also having an impact on leisure destinations for Canadian and European travelers. There is no doubt that the expansion of Zika in Florida, and likely elsewhere, will fuel declines in vacation spots as well.

However, with only 18.8% of submarkets in decline, this appears to indicate that the current cycle has a longer life expectancy.

To illustrate the history of RevPAR growth, the dashboard below delineates the running 12-month change for all 638 submarkets from 1989 through July 2016. Each submarket’s 12-month RevPAR delta is categorized into a bucket indicating its change percentage. Use the arrows or timeline above the graph to click through all 27 years.

To further cloud our bearings of where we are in the cycle, compare July 2016 to both July 1996 and May 2008. Each has similar metrics within their respective cycles with approximately 120 submarkets in decline. However, the cycle in the 1990s had almost five years remaining, while 2008 has only a couple of months left.

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