Cycle watch: Submarket behavior in the top 25 markets
Cycle watch: Submarket behavior in the top 25 markets
19 JUNE 2017 7:47 AM

The 167 submarkets in the top 25 hotel markets show some varying RevPAR trends when compared to all 639 submarkets in the entire U.S.

HENDERSONVILLE, Tennessee—After publishing my most recent “Cycle watch” article last month, a few readers asked about a closer examination of the top 25 largest hotel markets.

The question is if the larger hotel markets exhibit behavior that is similar or markedly different from all the other submarkets in the U.S. Recall that in 2016, the top 25 largest hotel markets generated $64.5 billion—or 43%—of the total $149 billion rooms revenue, but only account for 1.6 million roomnights—or 32%—of the total 5 million roomnights available. The top 25 markets contain 167 submarkets, which account for 26% of the 639 total number of submarkets in the U.S.

Charting the monthly percentage of top 25 submarkets with negative revenue-per-available-room change dating back to January 1989 creates the following scatter plot:

Not surprisingly, the larger markets see wider swings in performance. Whereas for the total U.S., the percent of submarkets with negative RevPAR change fluctuates between 8% (in May 2014) and 97% (October 2009), for the large markets the submarkets’ performance swings a bit wider. In November 2005, only 2.4% of all top 25 submarkets reported negative RevPAR change and in May 2009 all 100% showed RevPAR declines.

Interestingly, the regression analysis shows that the 0% RevPAR intercept in the chart above is 45% of markets, compared to the Total U.S. chart where the intercept was 43.5% of markets. In other words, the U.S. RevPAR change turns negative when a slightly higher percentage of submarkets in the top 25 markets show RevPAR decline.

One way to interpret this is that when only 75 submarkets (45% of the 167 submarkets in the top 25) report a decline in RevPAR, the U.S. number shows a negative change as well. Causality or correlation is of course the question; do the U.S. numbers flip because this small subset of submarkets flip, or are we just observing a timing issue? Keep in mind that the intercept is a theoretical value (more about that below), and the submarkets that have impact on the U.S. results cannot be pinpointed exactly, given the difference in industry cycles and regional performance differences.

When overlaying the RevPAR declines for the U.S. and top 25 markets, the data seems to basically change in lockstep, as would be expected.

Overall, it is probably fair to assume that the large markets do worse in the downturn and a bit better in the upmarket.

The only very noticeable exception seems to be the time period right after 9/11 when the total U.S. reported a smaller percentage of submarkets with declines than the top 25 markets. In fact, a detailed look at the year after 9/11 shows that more than 80% of top 25 submarkets had declines, but the number was significantly smaller in the U.S. overall. Not surprisingly, the 9/11 attacks hit the large convention and business travel destinations harder than the rest of the U.S.—and for a longer time period.

In a more “normal” environment, the relationship between all U.S. submarkets and the smaller subset of top 25 submarkets seems to be that the data moves more in lock-step as shown in the following chart detailing the most recent past.

In other words, the difference between the ratios is much less pronounced; in some months the ratio is higher for top 25 submarkets, while in other months it is higher for all submarkets in the U.S. For seven of the 12 months charted above, the percentage of submarkets in top 25 markets with RevPAR declines is higher. RevPAR growth in the U.S. over that time period has been sluggish (+3.1% for the trailing 12 months) and growth has varied between 1.2% in February and 5.9% in November 2016.

It is worth noting that, in April, 53% of submarkets in the top 25 markets reported RevPAR declines. Obviously the U.S. RevPAR growth data was still positive, which goes to show that the regression analysis resulted in a theoretical intercept value (45%) and the current reality does not always match the theory that U.S. RevPAR growth should decline.

Overall, the ratio of top 25 submarkets that report RevPAR declines mirror the ratio of total U.S. submarkets. It will be interesting to understand how this ratio changes as we see supply growth outpace demand growth and new competitors put pricing pressure on hoteliers in markets around the U.S., especially in the larger metro markets.

This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.

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