HENDERSONVILLE, Tennessee—A subset of developers and owners prefers to invest in only the largest hotel metro markets. But even within those markets they prefer to stay within the urban core, or the central business district. This article looks at the performance of the STR tracts that approximate the business district within larger market and points out differences and similarities in performance.
STR, parent company of Hotel News Now, provides insights into the performance of the top 25 largest hotel markets through our weekly and monthly Lodging Review. These reports do not specifically spell out the performance of the CBD. What makes up the downtown core or the CDB is a question of definition and, in our case, a question of hotel density. Because we need to report on a variety of chain scales and classes for each tract, we need a sufficient sample size of reporting hotels.
Below are the 10 markets and tracts that we studied more closely:
Summary comparison
When looking at the performance of the tracts and markets in aggregate and contrasting their quarterly average daily rate and occupancy performance, no big surprises emerge.
Downtown or core urban areas with their higher density of high-end hotels command a healthy ADR premium over the market overall. Looking back to the beginning of 2012, the premium has always been above $50. Noteworthy is the ability of the CBD hotels to increase their ADR year over year at a higher dollar amount than the market overall. In other words, the distance between the achieved ADRs is growing despite the already steep premium for hotels in the CBD.
Charting the occupancy comparison also yields the expected result. CBD hotels show a higher absolute occupancy. Noteworthy are the strong results of the downtown areas in the second and third quarters. When areas show a sustained occupancy of approximately 80% for six months, it stands to reason that most hotels are actually sold out during the midweek and Saturday nights. There is just no other mathematical way to achieve these results.
All the more surprising, given the last two charts, is the comparison of revenue-per-available-room percent change. Throughout the last seven quarters the full markets have consistently outperformed the downtown areas. One explanation may be that the occupancy in the downtown areas is extremely difficult to improve given the already high levels, and a higher percent change of ADR is easier to achieve given the somewhat lower ADR for the overall markets. These factors together can then explain the higher RevPAR change at the market level.
A look at historic RevPAR changes shows that except following the most recent recovery in 2011, CBDs actually outperformed the market RevPAR change, starting all the way back with the recovery post-9/11. It will be interesting to note if our data is an indicator of an outlier or a trend. In other words, will the CBD RevPAR change from now on be slightly below the market level change?
Market level comparison
The following tables show the performance of the 10 selected markets against their CBDs. Again, the assumption is that the CBD outperforms the market because of the higher density of high-end hotels and stronger demand generators.
And for the most part the assumption holds true. For the markets Dallas, Miami and Los Angeles, the market-wide occupancy is actually higher than the occupancy in the CBD. That probably implies that in these markets the main demand drivers are outside the downtown area, and hotel rooms are more disbursed.
The ADR comparison shows that the CBDs in almost all cases outperform the market, sometimes by a wide margin (Houston $68, Washington, D.C., $63). Only in Miami does the downtown area not perform as well as the market, which includes the high-end leisure destination of South Beach.
Summary
The downtown or CBD areas of large cities historically have been home to the major demand generators. These then attract room demand and with it hotel construction, often of the most high-end hotels in the market. This implies these hotels often register higher occupancies and charge more. For the majority of cases examined, the CBD ADR is quite a bit higher than the market ADR (Miami being an exception).
It is interesting to note, though, that after the last recovery the RevPAR change in the downtown areas seems to not keep pace with the market overall. Investors looking at hotels in CBD areas will need to decide if a healthy ADR premium outweighs this slower pace of growth when making an investment decision.