U.S. hotel industry revenue per available room dropped 1.2% year over year in October, marking the second straight month of decline, which is the technical definition of a downcycle. Year-end results, however, are likely to provide an upside.
HENDERSONVILLE, Tennessee—U.S. lodging performance in October is another indicator of the slow-growth environment that operators face in late 2019 and 2020, as revenue per available room declined again.
1. Trending down
RevPAR for the U.S. declined 1.2% in October, the second month in a row. Occupancy declined 0.8%, which is probably not a surprise after what we have been talking about, but average daily rate also declined 0.5%, after a string of months in which ADR grew, though by less than 1%. This decline marks the first time that U.S. ADR was down since March 2010, which is when the current upturn started.
Occupancy has now declined in five of the past nine months.
The RevPAR upcycle is now in its 116th month, with 112 months of those months showing positive RevPAR change. Is that still an upcycle? I have my opinion below.
2. 'Are we there yet?'
So when is an upturn over? When does a downturn begin? As your pesky brother kept asking from the backseat: “Are we there yet?”
Let’s look at what we know: RevPAR has now declined two months in a row—three months in the last year, and four months in the prior 13 months. Because everyone likes a record, we keep counting RevPAR growth months and are now at 112 out of the last 116 months.
That 112 months count is the record we had wanted and deserved, right? But of course it is fuzzy math since it was already back in the golden days of September 2018 that RevPAR declined for the first time—102 months since the RevPAR rocket took off in March 2010. Then RevPAR declined again in June (positive months counter: 110), September (112) and now October (112, still).
Is the upcycle over? Yes, it is. Two consecutive months of RevPAR decline are proof. But the other reality is this: annualized RevPAR will likely not decline at all in this cycle. So maybe, if you judge by year-end results, this cycle is not over at all. Our friends from Tourism Economics are clear about their conviction that GDP growth will continue to be positive, with no recession in sight, and this then fuels positive RevPAR growth. Our new 2020 RevPAR growth forecast isn’t pretty, but it’s realistic and realistically positive at +0.5%.
To get to that number, though, I would expect gyrations around the 0% point, meaning we will see plenty more months of mild RevPAR declines balanced by months with tepid RevPAR gains. That is the future we face, and the reality we already live in.
I guess the takeaway from this latest RevPAR decline is simply to heed Douglas Adams’ warning in The Hitchhiker’s Guide to the Galaxy: “Don’t Panic,” inscribed in large friendly letters on its cover.
Arguably the last few years were easy, and there is likely a whole crop of revenue managers out there who came of age after 2009, without any knowledge of a downturn and flat, or declining, RevPAR. But, as I said before, the expected GDP growth will drive demand, and we will continue to sell more rooms than ever, year after year after year. To coin a phrase: The upturn is dead; long live the upturn.
3. New STR forecast
After quarter after quarter of disappointing ADR growth results, we finally called a spade a spade and ADR growth for what it is—and likely will be: 1%, well below the level of inflation. Positive demand growth will not be enough to overcome 2% supply growth so occupancy will likely decline. That math then gets you to 0.5% RevPAR growth.
I don’t think STR has ever forecasted growth of zero-point-anything, ever. Our forecast was always much better or much worse but never basically flat.
4. Pipeline data
In-construction room count stands at about 205,000 rooms, up 5.5%. So, the 10% increase from a while back is just a faint memory and was likely an outlier.
The industry is still building less rooms than they had in 2007, despite this being the 10th year of the upcycle (or whatever you want to call this point in time).
5. Year-to-date and forecast
The year is almost over and our forecasts are now revised to meet the data where it stands. YTD RevPAR growth is now 0.8%, driven down by a slight occupancy decline (-0.1%) and nonexistent pricing power (0.9%).
So, where do we go from here? Our 2020 forecast is clear, and I hope the data will support our conviction of continued positive ADR growth because if that is not going to happen then the next few years could be ugly.
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.