Top 25: A performance overview of major US markets
Top 25: A performance overview of major US markets
14 SEPTEMBER 2016 10:12 AM

Presenters at this year’s Hotel Data Conference reviewed key metrics of top 25 hotel markets in the U.S. to forecast where they’re headed.

NASHVILLE, Tennessee—Hotels in the top 25 markets across the U.S. make up roughly a third of the nation’s total supply, according to STR, HNN’s parent company, making them useful indicators of the industry’s overall performance.

During two sessions at this year’s Hotel Data Conference, experts from STR discussed how the major U.S. markets have fared and where they’re headed. Karrie Keen, senior operations analyst for STR, gave a general overview of the markets during “A look into the Top 25 Markets: Part 1.” Brad Garner, SVP of client services and relationships at STR, took a deeper look at hotel performance in these locations with “A look into the Top 25 Markets: Part 2.”

Over a 12-month moving average, hotels in the top 25 markets made up 31.6% of the U.S. supply totals as of July 2016, Keen said. That’s the equivalent of 1.25 million rooms. Since STR has started tracking data in the 1980s, the top 25 markets have consistently stayed between 31% and 32% of the industry’s total supply. The top 25 markets have seen supply grow 1.5% year over year while all other markets have grown 1.3%.

“With this recession, there hasn’t been that bubble of supply,” she said. “That will be due to financing being a bit tougher.”

A total of 23 of the top 25 U.S. markets have seen increases in supply, according to STR’s year-to-date pipeline numbers through July 2016. New York City, for example, reported 15,770 rooms in construction. Garner said New York’s supply boom has been building for quite some time.

“It should be no surprise to most folks that New York has had a supply issue for a couple years,” he said. “We know what’s going on with rates. They’re really not growing at a significant pace because of that supply that’s been super competitive.”

Garner highlighted Dallas as a market with increases in supply that is still performing well. As of July 2016, Dallas had 5,562 rooms in construction.

“Dallas always makes the list for putting in rooms, they love to build hotels in Dallas,” he said. “This go-around though, they’re actually absorbing rooms fairly well; Dallas is performing pretty well to this point.”

Demand and occupancy
With the exception of 2008 and 2009, the number of room nights sold each year since 2007 has continued to set records, Keen said.

“We were at 415 million in July 2015,” she said. “We’re (now) ahead of where we were last year.”

Demand growth among the top 25 markets has slowed, however, in recent years. While it declined 7.1% in 2009, it rebounded to a high of 8.6% growth in February 2011. Growth has come down to 1.7% currently.

At the same time, the industry is reporting some of its highest absolute occupancy levels ever reported, Keen said, reaching more than 80% in a handful of top 25 markets.

Room demand is still positive in 20 of the top 25 U.S. markets, and absolute year-to-date occupancy through July 2016 was 74.7%. Norfolk, Virginia Beach, Virginia, reported the lowest year-to-date occupancy at 60.3%, but Garner said most of the top 25 markets are above the national average in the metric.

“Things are slowing down, we know that, we’ve talked about compression that exists within the Top 25 markets, but on a year-to-date basis, look at how many markets are over the national average,” he said. “U.S. right at about 65%. Only 23 of the top 25 markets are in excess of industry average around 65%, and some are way up into the 80s and high 70s, so it’s pretty astounding in terms of just absolute occupancy percentage.”

However, Garner noted that 12 markets have reported year-to-date occupancy declines when compared to 2015. Houston experienced the steepest decline (-8.3%) in year-over-year, year-to-date occupancy.

Group demand

When comparing transient and group demand in the top 25, Keen said the luxury and upper upscale segments’ transient business drove the recovery. Transient has started to flatten out at about 0.6% year-over-year growth, she said, while group is down -1.7%.

She noted hotels have grown more reliant on transient demand. In 2004, there were 19.5 million more transient roomnights sold than group.

“Now there about 45 million more (transient nights) than group rooms sold,” she said.

Group demand in the top 25 markets leveling off is a sign of the end of the current cycle, Garner said.

“In terms of absolute roomnights sold, there’s really no growth to speak of, and to me that’s kind of the backboard or base of business that we build transient off of,” he said. “Transient’s been robust, but imagine where we’d be with record levels of demand if we got some group growth. … If this cycle is going to persist, we’re going to have to get more out of groups so we’ll actually be able to leverage that transient rate.”

ADR and RevPAR
Over the past few recessions, average daily rate has taken a sharper decline each time, Keen said. It took 51 months to recover the $9 drop in daily rates following the recession in the early 2000s. While the recovery after the latest recession took longer at 61 months, it also had to make up for the $18 drop in daily rates. At the moment, hotels in the top 25 markets are experiencing 3% ADR growth on a 12-month moving average, while those outside of the top 25 are seeing growth of 3.7%.

Recently, ADR has driven RevPAR growth, she said, and that will continue for the time being. While markets outside of the top 25 are experiencing greater RevPAR growth, she said those in the top 25 are hit harder by downturns but have bigger rebounds.

As the cycle begins to unwind, hoteliers in the top 25 markets might be tempted to drive up rate, but only five of the top 25 markets have experienced flat or negative year-to-date ADR growth through July 2016.

Garner highlighted Miami’s 2% year-to-date ADR decline, which is third behind New York (-3%) and Houston (-2.2%).

“Obviously (in Miami) there’s some concerns with Zika,” he said. “The other thing that’s occurring in Miami is South Americans are not coming up because their economies are in distress and that’s impacting outbound travel. We’ll see how that plays out in the future with Zika as well as South American business into the United States through Miami.”

As far as revenue per available room is concerned, Garner said 19 of the top 25 markets reported year-to-date RevPAR growth through July 2016. That’s probably the best indicator of the current “inning” of the cycle.

“By and large, RevPAR percent change is still fairly healthy and significant for most of the top 25 markets,” he said.

Supply in the top 25 markets is steadily increasing, Keen said, from a recent low of 0.5% year-over-year growth in 2012 and 2013 to 1.1% in 2015. The STR forecast is 2.1% for full-year 2016 and 2.2% in 2017.

Demand dropped during the recession, falling 5.8% year-over-year in 2009 compared to the previous year, but then it rebounded in 2010 to 8.5%. Demand decreased and increased moderately after that, reaching 2.7% year-over-year growth in 2015. The projected growth for demand by the end of 2016 is 1.9% and for 2017 is 2.4%.

Occupancy is expected to remain nearly flat in 2016 and 2017, dropping 0.2% then gaining 0.2%, respectively.

“There’s not a lot of expected occupancy growth for the next few years,” she said.

ADR growth will continue to drive RevPAR growth, she said. ADR is forecasted to grow 3% in 2016 and 3.2% in 2017, leading to RevPAR growth of 2.8% in 2016 and 3.3% in 2017.

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