The Wall Street Journal earlier this year published an article that brought to light the buoying effect of oil on income levels in oil-rich metropolitan areas. The shale deposits in Northwest Colorado and the vast oil fields in Texas and Louisiana created a large, yet not-too-surprising boost to the health of their local economies. While the nation fell into the worst recession it has seen since the 1930s, these few metropolitan areas headed in the opposite direction: up.
As hotel analysts, we at PKF-HR and STR, parent company to HotelNewsNow.com, asked ourselves, what happened to the hotels in these oil oases? Did they ride the lucrative wave as well, or were there other factors at play that held them back? We know from our experience hotels rely strongly on movements in the economy in which they reside. Over the period 2007 to 2010, the top five performing markets from a household income standpoint were all benefactors of oil.
To answer our question of hotel performance in these areas, Table 1 shows the growth of demand for hotels in these high income growth markets. Surprisingly, the income growth was unable to bring hotels out of the recession in the top two markets. In Table 2 below, we begin to understand why.
While Lafayette, Louisiana, and Grand Junction, Colorado, saw the largest gains in income, they either lost or added practically no new jobs to the area. The areas in Texas on the other hand saw modest to stout improvements in the employment situation and it positively impacted hotels. Interesting as this might be, it is far from the complete story.
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Jan Freitag, senior VP of global development, STR
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For the past 12 years, PKF-HR has maintained the Hotel Horizons econometrically derived models of hotel demand. From this experience, we have determined that income and employment levels in the metropolitan area are the two best determinants of hotel demand changes, however the level of dependence on each variable differs by property type. Upper-priced hotel brands, such as Marriott, Hilton and Westin, are more reliant on corporate bookings than their lower-priced counterparts, such as Quality Inn, Comfort Inn and Super 8. Corporate travel is reliant on the bottom line and so is the income obtained by individuals who work at these corporations. Therefore, upper-priced properties are more closely linked to movements in income and corporate profits than their lower-priced counterparts, which are more reliant on a population with high levels of employment.
Illustrated in Chart 1 above, income levels in the United States began to recover by 2010 because of a surge in corporate profits, but employment levels lagged considerably. By the third quarter of 2011, the upper-priced segment of 49 of the 50 largest U.S. markets saw a demand recovery to its previous peak, fueled by the corporate profits and income recovery. The lower-priced segment of only 16 markets saw a full demand recovery in this time frame because of their reliance on employment.
As you might have imagined, this becomes quite relevant to our oil markets. Table 3 plots the high income growth markets with an upper-priced and lower-priced breakdown, as well as market level employment changes.
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Aaron Walls, Senior Economist at PKF Hospitality Research
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With a heavy weighting of lower-priced rooms (Table 4), these markets are far more reliant on movements in employment over movements in income (Table 3). The upper-priced properties in our high-income growth markets saw very impressive gains in demand, where their lower-priced counterparts struggled.
While gains in employment almost always result in increases in income, gains in income do not always result in increases to the job pool. In many of these markets, the oil industries were long established and already harvesting the maximum oil their infrastructure would allow, so any increase to the price in oil would flow through to the bottom line without any corresponding increase in expenses including labor.
These findings reinforce the concept that the health of upper-priced and lower-priced hotels is dependent on different economic forces. The hotel industry benefits from movements in income and employment as they are a proxy for the overall health of the economy. Upon further inspection, we can see how the economic dynamic changes between the upper-priced and lower-priced property types, and we can take this knowledge when evaluating the future performance of any hotel or hotel market.
Jan Freitag is charged with exploring opportunities related to STR's development initiatives. He is the author of a recurring column in Lodging magazine, presents lodging performance trends at industry conferences, and is often quoted in trade publications.
Aaron Walls is senior economist at PKF Hospitality Research. Aaron joined PKF-HR in 2007 where he played an integral role in the development of the firm’s flagship forecasting platform, Hotel Horizons, and is charged with the oversight of all econometric and financial modeling activities for PKF-HR. Aaron is a member of Cornell University’s Johnson Graduate School of Management class of 2014, and received his undergraduate degree in Economics from the University of Georgia in 2006.
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