When looking at the U.S. lodging industry performance, STR, parent company of HotelNewsNow.com, together with a host of analysts, normally focus on the results in the 25 largest metro markets (excluding Las Vegas). Thirty-one percent of all rooms and 42% of all room revenue dollars are generated here, justifying the attention. However, in our presentations we’re often asked to comment on secondary or tertiary markets. And while we are flattered that our reputation seems to be that we have all market data memorized, it is hard to keep track of each of the 94 metro markets.
As an aside: 162 STR markets cover the U.S. but only 94 of them are metro markets following the rough outline of the U.S. census department’s Metropolitan Statistical Area designation. The remainders of the markets have catch-all designations such as “Tennessee Area” or “Wisconsin South.” This article discusses the performance of the metro markets through the first quarter of 2012.
Rather than discussing each market individually we sorted the markets by size and grouped 25 of them together resulting in the following four sets.
The main takeaway from the demand chart is that the most recent swings in demand seem to be more uniform and less erratic. Whereas post-9/11, the hotels in the top 25 markets registered demand declines on a much larger scale than other markets, the last economic downturn was a bit kinder to those same markets.
The somewhat disjointed demand swings that characterized the time period between 2002 and 2008 are a thing of the past, and room demand changes are now moving in lock step across our coverage universe. Properties in the bottom quartile, which have traditionally seen less extreme gyrations in either direction, still provide a hedge against large demand swings. But the difference in demand percent change between the largest 25 markets and the next 50 markets seems negligible. From an owner/investor perspective this probably means that it will be increasingly harder to find a portfolio of markets that outperform the U.S. numbers.
ADR percent change performance
Despite the somewhat similar performance in demand change, the average-daily-rate percent change chart shows that there are still distinct differences when it comes to changes in price across the four selection sets. The top 25 markets, which discounted more during the period around 2002, outperformed their counterparts during the period between 2004 and 2008.
During the great recession (after 2008) the discounting was once again stronger, but in the last few years the rebound was somewhat more anemic than expected given past behavior. For investors and owners this probably still means that if you can time the recovery correctly (granted that’s a big “if”) the upside for ADR and profit increases is still highest in the top 25 largest markets. Over the last few years there seems to be virtually no difference in the changes in ADR between the second and third quartile, which are the markets ranked between Nos. 26 and 75 by size.
(The sharp drop in the September 2011 numbers for the last quartile data—shown as the green line—can be attributed to the Lexington, Kentucky, market, which in September and October of 2010 hosted the World Equestrian Fair with more than 500,000 visitors and ADR increases of more than 50% in those two months. ADR in the comp months in 2011 was subsequently depressed.)
Absolute ADR performance
When charting the absolute ADR starting in 2007, a somewhat curious picture emerges. We would have expected that market size predetermines ADR and that the four selection sets would have consecutively decreasing ADRs.
As it turns out, West Palm Beach, Florida, Maui and Kauai in Hawaii—in the third quartile market of 51-75—are leisure destinations and skew the ADR for their grouping higher. This is why the third selection set has a higher ADR than the second. It is noteworthy as well that the ADR of the second grouping decreased $4 between 2007 and 2011, and the ADR for the fourth grouping decreased by only $1. In effect, the ADR for the properties in the nation’s second-tier city is now only as high as in the properties that make up the rankings of between Nos. 76 and 94.
From the charts it seems that the demand changes throughout the last recession hit all markets equally and that the recovery also is happening across the board at (almost) the same pace. Fluctuations in ADR are still more pronounced in the largest 25 metro markets but seem to have assimilated over the most recent past. Average daily rates are mostly determined by market size, but notable exceptions move smaller, leisure-oriented markets in a much higher ADR bracket. Overall, U.S. hotel markets behave in a much more homogenized fashion, making it harder to pick distinct outperformers to beat the U.S. performance overall.