Freitag’s 5: Continued demand strength begins summer
Freitag’s 5: Continued demand strength begins summer
31 JULY 2017 7:50 AM

Positive occupancy and ADR drove RevPAR up 2.8% in June. The month even set a new demand record.

HENDERSONVILLE, Tennessee—June results were OK, and in line with expectations.

Revenue per available room increased 2.8%, driven up not surprisingly by average-daily-rate growth of 2.1% and—maybe a bit surprisingly—by occupancy growth of 0.7%. So, RevPAR has increased for 88 months running, and we really do not think this will change much in the next few quarters.

Here are some other noteworthy developments in the June data.

1. Wednesdays behind demand boost
A total of 113 million roomnights sold is a June demand record, and it’s an increase of 2.9 million roomnights from June last year. So, where are those guests coming from? Well, we do not track that, but the occupancy by day might yield some insights. Here is a look at occupancy data from June for this and last year:

So, the obvious reason is Wednesday, where occupancy increased by 3.4%. This would hint at strong business travel demand. But looking at the calendar reveals that we dropped one Wednesday from last year and added a Friday this year. The Wednesday that was dropped was June 1, which fell in the week of Memorial Day, so we only reported a 64% occupancy for that day. Not having to account for such a low-performing Wednesday then made this year’s June average data much better.

Saturday’s occupancy drop may be a bit surprising, but keep in mind that supply increased by 1.9% from last year, so even a 1% occupancy decline means that demand grew 0.9%. For Wednesdays, this same math means that demand increased 5.2%.

Demand growth was healthy—and honestly a bit stronger than I had expected. Yes, maybe the calendar helped a little bit, but overall this year has certainly surprised on the upside:

2. Segmentation data
With school breaks in full swing (see our School Break Report), group occupancy declined slightly (-2.1%) while transient occupancy grew 1.4%. Group demand was actually down 0.2%, marking the third month this year in which group demand declined. Transient demand increased each month this year with the exception of March, due to calendar shifts.

A cautionary sign maybe the prolonged lack of pricing power, which in June also hit group room rates. ADR increases were very muted (group +1.3%, transient +1.2%). I am curious to see if this pricing trend will revert, and we will be able to report accelerating ADR growth figures when the meeting season starts in August.

Here are the June ADR percent changes by segment for the last few years:

3. Occupancy, RevPAR growth don’t match up
All chain scales recorded occupancy growth of more than 65%, and almost all recorded occupancy increases. As was true last month, upscale occupancy declined 0.3% because supply growth hit 6%. Although demand growth is healthy, it’s just hard to overcome this much new room supply. And I can almost predict this will be the story from here on out for upscale hotels.

Occupancy gains for economy hotels (+1.3%) and independents (+1.1%) outperformed all other scales once again. And once again, the pricing power was strongest on the lower end of the spectrum (midscale +2.9%, independent +2.7%), which then drives the RevPAR gains. The riddle is how a scale segment can sell eight out of 10 rooms and not gain more meaningful RevPAR increases, as demonstrated in the upper-upscale and upscale segments.

Part of the answer for the upper-upscale segment probably lies in the lack of group pricing power, as seen in the chart above. Part of the answer for the upscale segment is possibly the fear of coming new supply. But still, in this environment, I would think transient room rates—those with small booking windows—should give a meaningful boost to overall ADR growth, and that is not happening.

4. A good sign in pipeline
This chart is quickly becoming my new favorite:

The point is that while rooms in construction are still increasing year over year, the absolute figure is declining month to month. Currently, we count 187,000 rooms in construction, which is an increase of 12%. This slightly small number could be a very good sign for the industry if it points towards a trend that continues for a while. It is always hard to predict what will derail a positive RevPAR run, but what is certain is that overbuilding will do it, if a black swan event doesn’t hit first.

Speaking of pipeline growth rates, it’s noteworthy that the number of rooms in construction and planning in the upscale segment seem to not have moved meaningfully from last month. That is unusual:

Given that the supply growth in that segment stands at 6%, a little breather in the pipeline is probably not a bad thing. Again, let’s keep in mind that number is the result of the accumulation of thousands of micro decisions made by developers in their specific submarkets. But I interpret this to mean that the folks who want to get into this segment are in it, and the ones who are thinking about it might not be getting financing or might realize that they are a bit late to the party.

5. Occupancy vs. ADR
The larger markets recorded healthy demand growth (+2.7%), which propelled occupancy up 0.2% to 79.2%—a pretty full house if you ask me. Indeed 12 of the top 25 markets recorded occupancies of more than 80%, and most were able to capitalize on this. Most, not all.

New York City hoteliers continue to trade ADR for occupancy and San Francisco hoteliers are trying to make up lost group demand—due to the Moscone Center being closed for renovations—with lower-rated transient bookings. But does that really necessitate a 10% drop in rate in the high-demand month of June?

RevPAR growth in the top 25 markets was 1.8%, a bit over half of the RevPAR growth in all other markets (+3.4%). All other markets continue to do well, as they are able to drive ADR (+2.4%) more quickly and seem to do so while driving demand (+2.6%) at basically the same level as the nation (U.S. demand: +2.6%).

New supply in the top 25 markets (+2.5%) continues to be the story, but that number understates the rather hefty increase that a few markets face—16 of the top 25 markets recorded supply increases larger than the U.S. supply average (+1.9%).

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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