U.S. hotel performance growth slowed significantly in November as both ADR and RevPAR growth were under 2% and the number of rooms in construction saw its biggest year-over-year increase in more than a year.
HENDERSONVILLE, Tennessee—Just like this year, the job of data interpretation will become harder in 2019 due to pesky calendar shifts that change group demand patterns and overall U.S. performance.
So, I would suggest that you print this chart out and put it on your bathroom mirror so you have a reminder for when the data is either very amazing or very poor that “it’s just a calendar shift.”
Of course you are right, this year Easter fell on 1 April, but the point is that the week leading up to it was in March. So in 2019, that week will see better performance and the week ending 21 April will see weaker performance.
1. Mudding along
November revenue per available room increased 1.6%, driven by average-daily-rate growth of 1.2%, which, honestly, is just disappointing. However, it’s not really growth, it’s more like the industry is “muddling along.” Fun fact: ADR growth was the lowest since September 2017 and the lowest November growth rate since 2010—OK, that was not fun at all, actually.
Occupancy increased by 0.4%, the sixth straight month that occupancy increased zero-point-something, and remember, it declined in July and September. So the pattern is, was and will be sluggish occupancy growth, if we have any growth at all.
The industry sold 97 million roomnights in 2018, 2.5% more than last year—that equates to an additional 2.3 million roomnights sold. Sounds good, until I tell you that last November the increase from 2016 was 2.9 million rooms. So the rate of growth is slowing. In fact, in the last three months we sold fewer additional rooms than we did when compared to the 2017 growth vs 2016. Supply increased 2%. Again. For those of you keeping score at home, we have now reported a 2% increase for nine months this year, eight of them consecutive.
Occupancy (61.7%) and ADR ($124.22) are the highest ever for the month of November, no surprise. But obviously we are now in the months—November through February—where occupancies are pretty low, meaning sub-62%, and hence ADR increases will be muted. So, if I had to guess I would think that the November percent change data is a sign of things to come.
2. Class data
The slow growth in the national occupancy figure actually masked the fact that a few classes actually recorded occupancy declines, and I am afraid that increasing occupancy will get successively harder. As usual, luxury and economy hotels did well-ish, driven by continued demand increases, but for the four other classes we recorded little growth or declining occupancy. Since group occupancy declined, so did upper-upscale class occupancy. Oh, and upscale occupancy. Oh, and upper-midscale occupancy. Which leads to little to no rate increase. This dragged RevPAR down for upper-upscale and upscale hotels.
So, the upper-upscale and upscale occupancies have been pretty soft before and this will be an important item to watch.
But one other quick note: The decline in occupancy hits hoteliers on the property level. But on the national level, the number of rooms sold continues to increase, even when occupancy falls. So in November all classes reported positive demand growth.
I would not expect this pattern to change as long as GDP growth is positive and the American economy is expanding. But when GDP declines, we have bigger things to worry about.
3. Pipeline data
Just as occupancy growth is pretty sluggish, the pipeline wakes up from its long slumber. The number of rooms in construction (I/C) increased 7.8%, just the second* time we reported an increase higher than 1% in well over a year.
The positive spin on that data set remains that the number of rooms in construction has declined in nine of the past 12 months. The negative interpretation could be that the number of rooms in construction has made a considerable jump and so … watch out, Alice.
Then again the total under contract number has not moved much:
As always, a month does not a trend make, so let’s see how the next two or three months pan out. Watch this space.
4. Comments about YTD 2018
So the year is almost over and the results are basically locked. RevPAR is up 3%, driven by ADR growth of 2.5% and an occupancy lift of 0.5%. It’s nice to see that we continue to break records on all fronts. Just to make you feel all warm and fuzzy, here is the demand increase in absolute rooms sold year-to-date November for the last four years:
The number of room sold is actually increasing year over year over year. Sweet! And the accumulated room demand is just under 1.2 billion roomnights. Room revenue stands at $152 billion, which is $52 billion more than in 2007, so we basically grew room revenue by 50% in 11 years. Not bad.
5. Zero percent RevPAR growth
When I present to Wall Street analysts or their clients—private equity or institutional investors—I often get the question “Could you envision a scenario where RevPAR change goes to 0%?” And my answer is basically: “No, I cannot.”
As long as GDP growth is positive and in the 2% range, I am feeling good about demand growth in the same range (+2% or so). We understand supply growth really well and that supply will continue to grow around 2%, so basically supply growth and demand growth will be in equilibrium for a while (i.e. occupancy percent change = 0%). So then to get to zero percent change, RevPAR growth implies that ADR growth is indeed zero percent as well. And I have a really hard time with that idea.
The truth is this: ADR will either grow at the rate of inflation (+2% or so) as long as demand growth is good, and once demand declines—which would imply a recession—then ADR change will quickly drop to -10% or so, made worse by occupancy declines. Yes, I am being very pessimistic with my outlook when it comes to a recession but if “what’s past is prolog” as Mr. Shakespeare taught us in “The Tempest,” Act 2, Scene I, then all discounting we experienced post 9/11 and post-2009 will lead to even more of it when the economy gets worse.
So, to answer the question: I cannot envision 0% RevPAR change. I can envision a 2% growth or 15% decline, but not 0%.
Jan Freitag is the SVP of lodging insights at STR.
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.