U.S. room demand continued to grow in July as the major key performance indicators remained positive, allowing hoteliers to enjoy some of their summer season.
HENDERSONVILLE, Tennessee—The U.S. hotel industry continues to be stuck in its slow-growth to no-growth rut, and it’s unlikely for this to change this year or in 2020.
1. KPIs in July
Calendar shifts. Love ‘em. Hate ‘em. Live with ‘em. Last month we all cried in our Jack & Cokes as an extra Sunday lead to revenue-per-available room declines. Then in July we added a Wednesday and, voila, RevPAR increased 1.1%. Therefore, we have now observed the longest RevPAR expansion—tied with the early 1990s—of 111 months in a 113-month period. But the trust me, our RevPAR gains are perilously close to 0%, and we are going to ride the roller coaster of small increases and small declines in the U.S. RevPAR data for some time coming.
Room demand increased 2.4%, making July the fifth month that demand increased by more than 2%. That is certainly a good track record and hopefully a sign of things to come for the remainder of 2019. As expected, July’s demand of 122 million rooms sold was the highest room demand for a July and the single highest room demand month ever recorded.
Supply increased by—you guessed it—2%, as it has (and as it will). No news there, which is overall quite helpful since the demand growth numbers are not going anywhere and—if anything—are going to further slow.
Occupancy grew again by 0.4% after June’s occupancy decline, but you can see the pattern in this table:
If positive, occupancy change will be around 0.3% and seldom more, but negative every once in a while (just to jolt our Wall Street clients). ADR growth was very slow (+0.7%) and I am not sure what would make that number better, other than the occasional easy comp. Looks like we are stuck in a rut of “not zero is good” for occupancy growth and “one is the new YAY” for ADR increase. That just means that as expenses rise for operators, they really need to find revenue outside of the plain old rooms revenue to boost their top and hence their bottom line. It looks like ADR growth alone is just not going to cut it when it comes to driving profitability.
2. Recession odds
So let’s be clear: We do not foresee a recession in 2019 or 2020, and therefore we are continuing to forecast continued RevPAR growth in 2019 and 2020. The Master of Macro, the Earl or Econ, the Data Duke Mr. Adam Sacks from Tourism Economics, stood on our stage at the Hotel Data Conference and declared that the recession probability between 2019 and 2020 had increased (from 15% to 40%), but he still does not foresee an end to the up-cycle. That said, Tourism Economics’ new U.S. GDP forecast was lowered to 2.3%.
Given this, the Q2 results and June year-to-date RevPAR growth of 1.1%, STR President and CEO Amanda Hite released our new, lower RevPAR forecast for the 2019: 1.6% growth. Here are all three macro forecasters’ expectation for this and next year:
What stands out? We are the bulls in this scenario, if you want to call 1.6% RevPAR bullish. Now, truth is that the July YTD ADR growth is 1.1%, and to get to 1.4% a lot of good things have to happen in the last few months, but it’s not impossible. As I said before, let’s see if September can provide a much-needed lift to the numbers.
3. Class data
Basically all growth rates across the KPIs across the classes are zero-ish. Luxury lost a little bit of occupancy, upper midscale gained a little bit of occupancy and RevPAR but that was basically it.
Because Group ADR growth was OK (+2.5%), upper upscale rate growth led the way at a snail’s pace (which, did you know, is 0.03 mph). Not sure there is a whole lot more to interpret here. Growth rates for all chain scales are small, and it will be very interesting to see how the meeting season develops. One indicator that does not bode well for the August data is the 28-day moving average through the first two weeks:
So, July results were basically flat to slightly up, and so far August looks flat to slightly down.
4. Top 25 markets
You win some and you lose some, and in the top 25 markets you mostly lose these days. RevPAR was down 0.8%, which is the fourth month this year with RevPAR declines. In contrast, U.S. RevPAR only declined once this year.
This is a function of a pretty hefty supply increase (+2.5%) in the top 25 markets, which led to an occupancy drop because demand grew “only” 2.3%. But despite continued demand increases and a fairly high occupancy of 78%, room rates declined for the first time this year (-0.6%) and dragged down RevPAR:
RevPAR growth in all other markets was driven by somewhat healthy ADR increases, pointing at some pockets of pricing power or maybe some revenue managers with confidence.
5. Hotel stocks
Every once in a while it’s good to compare what we see and feel with how the stock market sees and feels. The STR/Baird Hotel Stock Index is a unique tool for this. It creates an index view of the 20 largest publicly traded hotel companies by market capitalization. So far in 2019, the Hotel Stock Index performance has been pretty good; the index increased 18.8% between January and July.
It looks like despite the continued weakness in ADR and RevPAR growth across the classes and markets, investors value the lodging industry more today than they did on 1 January. True, some companies have international exposure—which is doing well—and the large C-corps are mostly valued on their fees from unit growth, not RevPAR growth, and while the pipeline is healthy their stock prices are healthy. But still, it seems like a bit of a disconnect. Or some people know something I don’t know.
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.