BROOMFIELD, Colorado – As Jan Freitag continues to enjoy his paternity leave, we were asked to fill in this month with June’s “5 Things to Know,” the review of June’s U.S. hotel performance.
We work out of STR’s consulting & analytics office in Colorado, and we’re happy to be the guest-bearers of mostly good news for the month, but also discuss some not-so-great trends we’re seeing this year, now that half of 2016 is in the books. (STR is the parent company of Hotel News Now.)
1. June RevPAR growth finishes stronger Q2
June revenue-per-available-room growth (+3.8%) was double May’s RevPAR growth. Once again, this was primarily driven by an increase in average daily rate (+3.5%), but occupancy did slightly increase as well (+0.3%), and for only the second month this year. The group segment carried the month with a 6.2% RevPAR increase, while transient RevPAR saw only modest growth (+1.4%).
June’s RevPAR growth was a solid finish to the second quarter. This was encouraging considering the somewhat disappointing first quarter. The second quarter achieved RevPAR growth of 3.5% versus the 2.6% increase measured in the first quarter of 2016.
Occupancy actually reversed direction by increasing 0.6% in Q2 compared to the occupancy decline of 0.6% in the first quarter. The shift of Easter to March 27th and into this year’s first quarter did give the second quarter a boost because of increased group business in April.
However, a strong June is a positive indicator for the rest of the summer. Many believe this will be a very strong summer for leisure travel, aided by lower gas prices and airfares.
We can also trumpet the 76th consecutive month of positive RevPAR growth for the industry. And while year-to-date RevPAR growth (+3.1%) is lower than previous years, all three key performance indicators are once again at all-time highs.
2. Supply growth reached 1.6% in June
For the first time since July 2010, supply growth hit 1.6% in the month of June.
Supply growth was sub-1% for 52 months leading up to April 2015 when growth reached 1.0%. Since that point, supply has been creeping up even faster. There continues to be new projects in the pipeline. However, these new supply levels are still well below development levels the industry experienced in the last cycle.
Supply in the top 25 markets continues to outpace the rest of the U.S. As of June, year-to-date supply has increased 1.9% in the top 25 markets, compared to 1.3% in the remaining markets. Three markets that have experienced supply growth in excess of 5% year-to-date include Houston (5.1%), New York (5.3%) and Austin (6.6%), and all three have several thousand additional rooms currently under construction (Houston 5,000; New York 15,500; Austin 4,500).
3. Slowing demand growth
With performance data for the first six months of the year, it appears that slowing demand growth may actually be a larger issue this year than new supply, at least on a national level.
Year-to-date demand growth has increased just 1.6% versus 3.0% demand growth for the first half of 2015. Just last February, TTM demand growth was up to 4.3%. So while supply is creeping up, demand growth has declined consistently the past 15 months and has slowed considerably so far this year.
New York and Nashville have led year-to-date demand growth at 5.5% for the top 25 markets, although in New York the major influx of new supply has been the primary reason for demand increases. Dallas has also shown stronger demand growth this year with 4.8% year to date.
Houston, of course, has experienced the largest demand decrease (-2.8%), while Orlando, Florida was also down 1.4%.
4. Transient ADR growth slowing
Another major theme in 2016 is the slowing of transient rates. Transient ADR increased 1.9% in June, but that was after flat performance in April and 0.3% growth in May. The June ADR increase was the strongest this year for the transient segment, along with March.
The slowing growth of transient rates is certainly a concern, as we’ve seen very low rate growth all year. In the last 12 months, transient ADR has increased 2.1%, down from 5% growth the prior 12 months. Furthermore, year-to-date transient ADR has increased by only 1.1%. This is surprising given the record levels of occupancy in most markets.
That’s really the story of this entire cycle as transient TTM ADR growth peaked at 5.7% this cycle, not even close to the 9.6% peak ADR growth in 2006.
5. Upscale supply growth starting to outpace demand
In the upscale segment, supply is starting to outpace demand on a year-to-date basis. This seemed inevitable given the continued interest in building upscale hotels; however, strong demand growth in the segment has offset 3%-4% supply increases in each of the last few years. For June year to date, supply increased 5.1% with demand growing at a slower pace of 4.8%.
Occupancy at upscale hotels is still high—74.4% year to date—and while demand is growing well above the national average, it will not be able to continue to match the pace of new construction. And there is still much more upscale supply in the pipeline—57,000 rooms in construction.
Rate growth in the segment also is slowing, with the introduction of so much new supply over the past few years. Rates are up 3.0% year to date compared to 5.3% at this same time last year.
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