Double-digit RevPAR growth for extended-stay?
 
Double-digit RevPAR growth for extended-stay?
27 AUGUST 2010 5:47 AM

It could happen—revised forecast indicates that extended-stay hotel RevPAR will be more than 10% higher in 2011 compared to 2010, according to The Highland Group.

A double-digit annual change in hotel average revenue per available room does not occur very often on a national basis. It did happen negatively in 2009, but the positive rebound in 2010 is unlikely to reach as high. However, if the correlation between extended-stay hotel and overall hotel performance coming out of the current recession is similar to the previous downturn, indications are that extended-stay hotel RevPAR will be more than 10% higher in 2011 compared to 2010.

STR’s revised forecast for the United States hotel industry for 2010 and 2011 projects stronger performance than the forecast issued as recently as June of 2010. The recovery is gathering momentum and we believe that extended-stay hotels will recover more quickly than we had anticipated only three months ago. Accordingly, we revised our forecast for the extended-stay segment through 2010 and 2011.

 

Note (1): Projected year-end

Sources: STR, The Highland Group 

Extended-stay hotel demand posted two consecutive quarters of growth above 16% in the first half of 2010. Demand is growing faster than the overall hotel industry, as it was emerging out of the previous downturn starting in 2002. What is very different this time is the change in supply. The growth rate in extended-stay supply started rising in 2004 and hit almost 6% in 2005 when overall U.S. hotel supply growth was essentially zero. Extended-stay hotel supply growth peaked at near 7% in 2009 but it is forecast to fall below 3% in 2010. In 2011, the projected supply growth rates for extended-stay hotels and all hotels are about the same. The main reason for this is that extended-stay room construction was the lowest for 15 years at the middle of 2010 and it is heading lower. 

A relatively fast rate of supply growth is one reason why increases in extended-stay rates often lag those of the overall hotel industry. This has occurred during this recession when discounts have been relatively deep. Moreover, positive monthly changes in extended-stay rates will not occur until later in 2010; whereas, STR reported that overall hotel average rates were up 1.3% in July 2010 compared to July 2009.

 

Note (1): Projected year-end

Sources: STR, The Highland Group

Despite much faster supply growth during the last downturn, extended-stay average rate growth started to better overall hotel rate growth in mid-2004 and remained there until 2007. If the correlation between average rate growth and increases in demand are similar as we emerge from the current recession, the historically low level of supply growth will boost extended-stay occupancy and ultimately the rate increase in RevPAR.

 

Note (1): Projected year-end

Sources: STR, The Highland Group

During the last downturn, extended-stay hotel RevPAR declined more than overall hotel RevPAR. It also stayed longer in negative territory before a relatively high peak in 2005 and then generally tracking the overall hotel industry until the trough in mid 2009. However, extended-stay hotel RevPAR did not fall quite as far as overall hotel RevPAR during this recession. Moreover, it spent less time in negative territory and its 7.5% increase in the second quarter of 2010 compares favorably to the 6.2% gain STR reported for the overall hotel industry. While it is too early to start popping the champagne, the outlook for extended-stay hotels has not been this good for several years. The table following summarizes our forecast.

  2009 (1) 2010 (2) 2010 (3) 2010 (4) 2011 (4)
Room supply 6.7% 5.5% 4.4% 2.8% 1.0%
Demand 0.4% 16.5% 16.3% 11.8% 7.2%
Average rate -10.2% -8.6% -3.4% -1.0% 5.2%
Occupancy -5.8% 10.4% 11.3% 8.7% 6.1%
RevPAR -15.4% 0.9% 7.5% 7.6% 11.6%

 

Notes: (1) Actual year-end

(2) First quarter 2010 compared to first quarter 2009

(3) Second quarter 2010 compared to second quarter 2009

(4) Projected year-end

Source: The Highland Group

Mark Skinner is a principal with Atlanta-based Highland Group. He can be reached at mskinner@highland-group.net.

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1 Comment

  • Tony August 27, 2010 9:28 AM

    "The recovery is gathering momentum" Perhaps you heard Joe Biden say that on Wednesday. How unfortunate to release this piece after a week of perhaps the most deflating economic news in months, capped by today's announcement that the second quarter GDP estimate has been nearly halved to an anemic 1.4 percent. Ouch ! !

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