U.S. hotels experienced the ides of March as low monthly growth ended the industry’s first quarter on a sour note, and despite a new demand record, March’s supply increase is the highest in a year-and-a-half.
HENDERSONVILLE, Tennessee—What do a “Game of Thrones” fan and a hotel revenue manager have in common? Both know that things are finally going to come to end; however, they just don’t know how bloody it will be. Winter is here, to coin a phrase.
1. A discouraging March
RevPAR growth in March was 0.6%, which means that the Q1 result was 1.5%, well below expectations. Occupancy growth in March was nonexistent (0%); but really it was negative (-0.0173%) when you look at the full number. This means, of course, that the rooms supply change (+2%) was equal to the room demand change (+2%). Room demand was the highest ever for a March (111 million rooms), but that does not really count for much. I mean, it’s a record and all, but that is just “as expected” these days.
So, if there is no occupancy growth, then pricing is/was/will be the thing to watch. March average daily rate was only up 0.6%, which is the lowest increase in room rate since June 2010, 10 months before “Game of Thrones” started its run. Now, I guess we should be thankful that between the non-existent occupancy growth and the barely existing ADR growth, RevPAR was actually positive, because that means the up-cycle is now in month 109 (108 of which had RevPAR growth).
2. The RevPAR stack
Let’s have some fun with numbers. In the past, some Wall Street analysts have used the “two-year-stacked” RevPAR methodology to get around the calendar shifts and figure out how the year will develop. The idea is that you look at how the sum of change over two years moves and then you project forward given that same estimated pace of change.
So, what we know is this:
With that in mind, let’s see how the year needs to develop to continue on the 5% stacked RevPAR growth trajectory:
In other words, to get to a combined 5% growth rate over two years, April will be weak (because of Easter), June will be weak (maybe because the Fourth of July is later and some groups will move back to the first week in July?), and September will be very strong because of an easy comp. This also means, though, that the second half of the year (+2.8%) needs to be quite a bit stronger than the first six months (+1.2%). This makes mathematical sense, but does it pass the sniff test? Do we really believe, nine years into the up-cycle, that things can get sequentially better? That is the question.
3. Segmentation data
The U.S. hotel industry’s slow growth results don’t bode well for the upper end, and indeed occupancy declined and rate growth was basically nonexistent or very slow for the group and transient segments.
RevPAR growth of any kind is probably worth noting, but a 0.5% increase on the group side is just a poor showing. Obviously the demand changes are still positive—0.2% for transient demand and 1.3% for group demand—the implication being that any demand increase below 2.5% will lead to occupancy declines. And achieving demand growth of that magnitude is of course a tall order given where we are in the cycle.
4. Pipeline data
I have been quite bullish on the lack of pipeline growth and the implication that the industry is not overbuilding this cycle. And for the total U.S., that is probably still true, but of course for select-service hotels the story is a bit worse as they will see the brunt of the construction. There are 201,000 hotel rooms in construction, and that number has increased 7.7%, which is the highest change since August 2017.
One thing to always remember is that our supply percent change numbers are “net” numbers, so they take into consideration the closure rate. Will Sanford from our R&D team did some interesting work on the closure numbers and published some slides. Here is the percentage rate of closures by collapse chain scale:
The point is that the independent hotels used to close at a much faster rate in the earlier part of the cycle and that pace has slowed, but there are still proportionately more independent hotel closures than branded closures.
5. Comments about YTD March 2019
For the last few years, I used to write about the annualized 12-month moving average data through March and then switch back to YTD reporting in April. But the 2019 data has been so poor so far that I feel it’s more insightful to report on what has transpired in the first three months. In short: nothing good. Unless you are in San Francisco where life has been a party.
All absolute KPIs are still at record highs as long we record positive growth rates, but since the growth rates are slowing, records will come to an end sooner rather than later. Just like a certain queen on the Iron Throne.
Here is a somewhat jarring image of the lack of Q1 RevPAR growth in historic context:
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.