STR publishes a lot of data. Every week, every month, our STAR reports go to the majority of U.S. properties and TREND reports are used across the U.S. in feasibility studies and valuations (well, mostly valuations these days). But every once in a while we publish one number that makes our phones ring off the hook and causes questions from clients across the spectrum.
Well, last week we published such a number. We are expecting the 2012 revenue-per-available-room growth for New York City to be negative—only slightly negative, but still.
Never mind we also are suggesting the other 24 of the Top 25 markets will experience positive RevPAR growth next year. Never mind the annualized U.S. demand number in July shows the highest number of rooms sold—EVER. Never mind, anecdotally, visibility into 2012 is getting better and group business booking pace is picking up. Publishing a negative RevPAR growth number for the city with the highest RevPAR sent shockwaves through the investment and operating community. We fielded numerous calls, all centered around the simple question: “What were you thinking?”
Allow me to explain. New York is what traditionally has been referred to as a “high barrier to entry” market. In other words, it should be hard to get in. Well, turns out it’s not so. The supply growth rate in NYC in 2010 was 4.9%, and for 2011 the supply growth should clock in at 6.4%. In 2012, we are expecting a 4%-plus increase in the rooms available. So much for having high barriers to entry.
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Now, I said it publicly more than once: I would never bet against New York. It sits in the epicenter of business, group and leisure demand. It commands the highest room rates. And it continues to build new demand generators attracting repeat and new guests.
On the other hand, being disproportionately exposed to financial and insurance business also has caused wild “gyrations” in the performance of the city’s hotel industry. During September of 2001, RevPAR declined 42%. Average daily rate dropped from US$276 (year-end 2008) to US$216 (year-end 2009).
But the city continues to be the gateway to the U.S., both from a leisure traveler and from a brand-building perspective. Having a physical presence here puts a hotel brand “on the map,” so to speak.
So, our (slightly) negative sentiment is really just a function of NYC’s continued success. Everyone wants to go there and everyone wants to be there. The supply increases during the last years were met with equal force by increases in room demand changes. During 2010, demand increased more than 10%, and this year the change is around 5%. Obviously these demand growth rates are not sustainable in the long run, and in 2012 we are suggesting room demand to increase around 1%. So we expect more rooms to be sold, but the pace of growth is slowing. This supply-demand imbalance then leads to a decrease in occupancy and we expect hoteliers, when being faced with the terrible possibility of a full-year 2012 occupancy of only around 77%, will raise room rates by a tepid 2%. This in turn leads to negative RevPAR growth.
Let me reiterate that for the 24 other top markets our expectations is that RevPAR should increase.
Now, in the investment community there seems to be the sentiment that “as New York goes, so goes the country.” Which leads me to the headline of this blog and the somewhat humorous exchange I had with an investor based in NYC: In the course of our email conversation I said: “You know, New York is not the US …” His response to me 15 seconds later was: “Nonsense!” He was joking, of course (well, I think he was), but I also feel his response points at prevailing sentiment that NYC is an important indicator for things to come.
Be that as it may, for the U.S. we expect supply growth to be less than 1% this and next year. Only a few markets will see stronger growth. A market with 4%-plus supply growth such as New York City will obviously see an impact on RevPAR in the short term. The math just works out that way.
Let this blog serve as request for all of us to look at the “data forest” not just as one (arguably, very tall) “data tree.” Let’s further the hope that our forecast of rate growth for NYC actually is well below the achieved rate when we report on the actual 2012 results.
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