The one data point we presented at the Americas Lodging Investment Summit this year that keeps reverberating through the hotel investor community is the continued anemic pace of group room demand.
Compared with the prior peak in 2007, our segmentation data shows the industry in 2012 sold 19% more transient rooms but still 3% less group rooms. Plenty of equity analysts and operators have commented on this fact and have confirmed that the recovery is driven by transient demand.
This article looks at the interplay of group versus transient demand by examining weekday (Sunday through Thursday) and weekend (Friday and Saturday) demand as well as average-daily-rate performance by month.
Even though hotels do not report the breakout of business and leisure travelers, we use the delineation by day as a proxy. So, it is probably fair to assume weekend travelers stay for leisure, and weekend groups are more prone to be hobby- or sport-related travelers than business related. When examining the charts, please keep in mind the segmentation sample only takes into consideration higher-end properties of luxury and upper-upscale chains and high-end independent hotels.
Segmentation data compared to 2007
Slides 1 and 2 show the demand percent change by month, broken out by weekday and weekend. As we have said before, compared with 2007, the room demand increase that has buoyed the U.S. industry is skewed toward transient demand no matter the day of week.
Both weekday and weekend demand have increased, but the weekend demand changes are more pronounced in a range of between 16% and 22%. At the same time, group demand is still mostly below its 2007 peak. This trend is stronger during the business-travel heavy midweek days, with demand still lagging between 3% and 11%. Interestingly, the June group demand is a basically flat (well, a little bit higher) for both weekdays and weekends perhaps pointing at a recovery of group travelers that are more leisure focused, given that this month is vacation season.
Slides 3 and 4 exhibit the average room rate growth for the same months and the same weekday / weekend split.
Whereas transient demand has increased across the board, transient weekday ADR growth shows the exact opposite pattern. In other words, it has yet to occur. Overall, ADRs are still between 1% and 8% below prior peak. In the shoulder months of February and November, hoteliers still have not capitalized on the higher number of rooms sold.
At the same time, weekday group rooms are slightly more expensive than they were five years ago with room rates up between 0.1% and 2.6%. Arguably, though, since inflation and expenses increased much faster than this pace, the real effect of the anemic growth is loss in profitability.
The weekend ADR recovery chart (slide 4) shows a slightly more positive picture with ADR increases during the summer months. The increases in group room rates for June are noteworthy because the room demand change is also positive. In other words, the industry is selling more rooms and at a higher price. Travelers in June are more likely to be leisure travelers, booking with their own money and probably a shorter booking window than the corporate meeting planner.
It will be very interesting to note if the trend for summer demand and ADR growth continues during 2013 and are pointing at a pronounced leisure-travel-driven recovery.
There are a few possible explanations that could shed light on the shift in segmentation mix. For one, our data does not cover Las Vegas. Las Vegas has plenty of rooms to fill, so it’s not unreasonable to assume casino hotels are trying to attract more groups through aggressive pricing.
Secondarily, we hear that leisure groups are having members book their rooms online without pre-registering a room block. Those rooms then show up in our sample as transient rather than group rooms; the shift may be a false negative. While group demand is indeed still strong, groups are just not being recognized as such.
Lastly, and this is probably most concerning, there might have been a shift in group meetings nationwide. We hear that meeting planners are booking smaller groups and more regional, smaller meetings rather than national events. The truth for the shift in segmentation mix is probably somewhere in the intersection of all these reasons.
Segmentation data compared to 2011
The next four slides discuss demand and ADR changes during 2012 against last year’s performance.
Slides 5 and 6 show the demand increases (and decreases) by weekday and weekend.
On the surface, the monthly demand fluctuations seem to move in opposite directions when looking at the weekday and weekend charts. In March, weekday demand is lower than last year, whereas weekend demand has increased compared with 2011. While the performance of hotels is better, one additional explanation is the months have a different number of weekday and weekend days. Here is a table detailing the day of week counts showing one reason for the demand swing year over year.
Taken these outliers out of the equation, it seems that the weekday demand performance is indeed quite strong whereas the weekend demand changes are probably more moderate or even negative. Even so, most of the transient demand changes are stronger than group demand changes, which is an additional indicator that transient demand drives U.S. performance.
ADRs were not affected too much by these calendar shifts, and weekday and weekend room rate growth was healthy as shown on slides 7 and 8. The only outlier was 31 December, which in 2011 fell on a Saturday and in 2012 on a Monday. This shift from weekend to weekday had obvious negative implications for December’s weekend ADR growth. It is, however, good to see that hoteliers took advantage of the increased number of travelers throughout the summer and were increasing their group and transient rates. That said, group ADR growth was still low and especially on weekends just around the level of inflation.
In sum, the segmentation shift from group to transient rooms is clearly visible when examining the monthly weekday and weekend performance. ADR growth is still anemic when compared with 2007. That said, compared to last year, hotels are finally increasing rates and this, we hope, is a sign of good of things to come.