In this point/counterpoint series, Jan Freitag makes a case for each side of the U.S. hotel recovery debate. Also read, “Pro: Blue skies ahead (why the worst is behind us).”
HENDERSONVILLE, Tennessee—Numbers don’t lie, but the current interpretation of a sustained recovery based on STR’s latest results may be a bit premature. There are definitely two sides to this story and here are some of the more dire facts that should not be overlooked:
Of course we have reported phenomenal growth rates across the board since the beginning of the year: The comparables were ridiculously easy. Room demand declined 8.4% in the first six months of 2009, ADR was down 8.6%. Anyone who expected less than stellar growth rates in 2010 did not understand the meaning of the word “rebound.” The true test will come in the fall of 2010, when the traditional meeting season is in full swing. Only those results—against less favorable comparables in late 2009—will give an indication of the sustainability of this recovery rally.
2. Group demand is still lagging.
Group demand declined almost 17% in 2009. And while demand is slowly increasing (+5.2% through June 2010), year to date the industry has sold 24.7 million fewer group rooms when compared to the first six months of 2008, and 26.5 million rooms fewer when compared to year-to-date June 2007. Without a solid base of group demand to build occupancy, hoteliers will not find the confidence to demand rate premiums from transient travelers.
3. Group rates are still declining.
Group rates are negotiated for a future date based on the current prevailing rates and the meeting planners’ sense of where rates are expected to go. Group rate negotiations that took place in 2008 and 2009 likely were tainted by the operators’ sense of gloom and doom and a desire to build occupancy going forward at any cost. So, it is very likely that group room rates will continue to decline into the foreseeable future. Through June 2010 group room rates already declined 4.7% and similar rates are locked in through the rest of the year. It likely will be 2011 until positive group rate growth will be reported.
4. New supply needs to be absorbed.
In 2009, industry players added 50 million roomnights more than in 2008, and through May 2010 an additional 18 million room nights were for sale. The year-to-date occupancy through June at 56.4% is the second lowest occupancy for this time period we have ever (!) recorded. The 20-year-average occupancy for this time frame is 61.3%, so another 5 percentage points have to be gained just to get back a somewhat “normal” level of operations—a tall order in any environment.
Even though the 514 hotels in New York City only make up 1.9% of the total U.S. room supply, their revenue share is just below 6%. Especially when examining the national ADR changes, the impact of this one market clearly can be felt. The U.S. ADR decline through June 2010 was -2.0%, but excluding the NYC hotels the national ADR decline increases to -2.7%. Even more pronounced is the impact on the luxury side of the market. Through May the luxury ADR was US$245 (total U.S. with NYC), but US$233 without NYC. When excluding the New York luxury hotels, the rate decline accelerated from -2.2% to -2.9%. So, our data is masking the fact that rate recovery for the nation, outside of this one market, is more elusive.
So, overall, the available data points show that a sustainable recovery is still quite a while off. It seems from our data that the worst may not be behind us and that the lodging industry has every reason to be cautious about 2010 and beyond.