“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
One common question from the investment community to us here at STR is: “So, how long will this ride last?” In other words, given the favorable supply and demand fundamentals for the U.S. hotel industry, how long will we see positive average-daily-rate and revenue-per-available-room growth?
A lot of pundits are trying to phrase the answer as a baseball metaphor, naming the inning we are in. Given my German background, I never quite understood the subtleties between “bottom of the fifth” or “top of the sixth,” but using a soccer analogy, something near and dear to my heart, I can say we are in the second half of the match. I mean this insofar as the majority of RevPAR growth is now coming again from ADR growth. In 2010 and 2011, positive occupancy change drove positive RevPAR change. Now, in the first quarter of 2012, occupancy increased 3.8%, while ADR increased 4%. We expect this trend of larger ADR increases to continue in the foreseeable future. But until when?
It is probably fair to assume that the demand growth rate, which was 7.2% in 2010 and 4.9% in 2011, will moderate to around 2% this year and during 2013. This demand number is actually quite close to the long-term U.S. average over the last 23 years of 1.8%. Couple this with the widely reported lack of new supply, and it is no surprise that the average occupancy in the U.S. increased to 60.5% on an annualized basis, 25 months after bottoming out in February of 2010. Arguably, that point in time was the beginning of the current cycle. Breaking through the 60% occupancy “magic number” gives many industry participants the feeling that now pricing power is firmly back in the hands of the operators. And coupling demand growth with a limited number of new projects on the horizon should yield ADR increases.
So is there a number that gives us pause? As the following chart shows, the STR hotel development pipeline, which has seen little activity over the last two years is finally heating up a bit.
After examining hotel projects with open dates that are three years into the future, we see the amount of rooms has shot up considerably from 4,000 rooms as reported at the end of 2010 to some 34,000 rooms as reported at the end of 2011. It is probably fair to assume that the 142,000 rooms with an open date of four-plus years as reported at the end of 2010 always included these 34,000 rooms in it. But breaking it out this way makes it clear that developers are eager to get back into the game after sitting on the sidelines for the last 36 months.
So, what does this mean for the U.S. hotel industry? For the next few years, ADR growth is expected to continue to drive RevPAR growth. As new supply projects hit the pipeline and then open, supply growth could outpace demand growth, and then occupancies would decline and pricing power could ebb.
That said, let us not forget the period between 1996 and 1998 when supply increased 2.4%, 3.5% and 4%, respectively, and ADRs increased 6.5%, 5.8% and 4.5% over that same period. For now it’s probably worth it for operators to keep a close eye on how the pipeline grows over the coming quarters to be prepared for the new competition.
So, does that mark the end of the upswing? Certainly not. But maybe it marks the end of the beginning.