HENDERSONVILLE, Tennessee—The dramatic decline in U.S. lodging industry performance, which began in late summer 2008, has affected almost all industry segments and markets. Five major markets—Phoenix, Arizona; New York; Detroit, Michigan; Atlanta, Georgia; and Miami, Florida—have experienced particularly sharp revenue-per-available-room declines based on Smith Travel Research’s latest three-month numbers ending February 2009.
Phoenix has endured the most pain, with occupancy declining 16.8 percent, and average rate sliding 14.2 percent. This combination pushed RevPAR down almost 29 percent. The market’s woes are exacerbated by significant supply growth—up 4.9 percent in the latest 12 months—and a large number of rooms in the construction pipeline.
Detroit’s recent occupancy declines are attributable mostly to decreased demand. In the latest three months, demand plunged almost 13 percent, reflecting the turmoil in the automotive industry. Twelve-month room-supply growth—up 3.2 percent—was above the U.S. average, while demand dropped 4.3 percent. Detroit faces difficult challenges from a demand perspective that’ll require creative solutions largely because of the restructuring of the automotive industry.
New York held up relatively well in the first three quarters of 2008. The bottom dropped out in October after the Lehman bankruptcy. New-room-supply growth is contributing to the problem—up 3.5 percent in the most recent 12-month period. Demand declined 8.5 percent in the latest three months; preliminary March numbers indicate an acceleration in RevPAR erosion. With a large share of luxury hotels and the retrenchment of the financial sector, hotel operators at the high end will be seeking new sources of business and exploring ways to reinvent their product offerings.
New-room-supply growth in the Atlanta market has been significantly below the U.S. average. But in the latest 12-month period, demand fell almost 8 percent. In the most recent three months, demand plunged more than 13 percent—the largest demand decline of the five markets we analyzed during that time period. Primarily a business-dominated market, Atlanta’s declines are influenced largely by corporate America’s expense reductions and the pullback of travel budgets.
Miami experienced the smallest occupancy (-10.6 percent) and RevPAR (-19.9 percent) declines of the five markets analyzed based on data from the most recent three months. Demand declined just 2.9 percent. New supply increased significantly in the three-month period, while demand declined 2.9 percent. The new-room-supply growth will contribute to occupancy challenges for the balance of 2009.
Looking ahead, four of the five markets likely will deal with continued, above-trend room-supply additions and their impact on existing hotel operations. Only Detroit, with about 800 rooms under construction, has less than 2 percent of existing room supply scheduled to come on line within the next 24 months. Phoenix—with 8 percent of existing supply under construction—is particularly concerning. While the New York metro area’s under-construction total is significant (8.5 percent of existing supply), average supply growth has been restrained during the past five years partly because of the conversion of hotel rooms into condo residences in Manhattan during the real-estate run-up. Consequently, new supply in the New York metro area likely will be more easily absorbed.
As with the total U.S. lodging industry, the five markets we reviewed will face strong headwinds for the rest of 2009. Recovery will happen as the economy stabilizes—generating new demand growth—and new supply is absorbed. In the meantime, hotel operators are faced with the daunting challenge of providing an excellent guest experience while holding costs to a minimum. The strong will survive—and thrive.