What to Know About STR's RevPAR Forecast

The STR United States hotel forecast suggests revenue-per-available-room growth in 2014 and 2015 is slowing. The forecast we released at the Americas Lodging Investment Summit shows that STR, parent company of Hotel News Now, expects an approximate 5.3% RevPAR growth in 2014 and 4.7% growth in 2015. This comes on the heels of the 2013 result of 5.4% RevPAR growth.

The decelerating pace has caused some questions, so this column should shed some light on the forecast.

In the words of Former United States Secretary of Defense Donald Rumsfeld: “There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say, we know there are some things we do not know. But there are also unknown unknowns, the ones we don't know we don't know.” 

Known knowns
1. Long-term RevPAR growth rate is 4.7%.
The straight average of RevPAR growth over the lifetime of the STR dataset back to 1989 is 3%, which includes three recessions. For the most recent time periods pre-and post-year 2000, the growth rates look as follows.

Table 1 source: Tourism Economics, based on STR data

Excluding the recessionary periods from these two time frames yields the following results.

Table 2 source: Tourism Economics, based on STR data

Over prolonged periods of time two observations hold true: Average-daily-rate growth is higher than inflation and RevPAR growth is primarily driven by ADR growth. In addition, the long-run “steady state” RevPAR growth seems to be about 4.7%.

Given this historic pattern, it is not unreasonable to assume that in 2015, six years after the downturn, the industry returns to growth rates that mirror the long -term “steady state” growth rate of 4.7%. Keep in mind this also means that in 2014 and 2015 the industry will again break all-time RevPAR records.

2. Rooms sold per capita is at an all-time high.
To understand the total potential capacity of the U.S. hotel industry, we relate the room demand that is generated per person and per employee in the U.S. over the last few years.

It’s worth noting room demand per person now stands at an all-time high. This certainly does not imply a demand ceiling, but it points to the strong possibility that growth rates will slow to a more measured pace, as evidenced in our demand forecast of 2.3% growth in 2014 and 2.1% growth in 2015.

3. New supply is rapidly entering markets.
It’s true the supply growth rate of 1.2% in 2014 and 1.6% in 2015 is still well below the long-run average of 1.9%. And so some observers discount the potential impact of these new hotels as negligible for now. But keep in mind that all supply growth is local and that in quite a few markets we have reported rapid acceleration of the rooms that are under construction.

It is not a stretch to assume these new hotels will impact occupancy growth, which in turn could have a negative impact on pricing in the market, and then in the aggregate, on ADR growth in the U.S.

Known unknowns
1. Is group demand finally rebounding?
A lot hinges on the answer to this question. For the past 24 months the annualized growth rates for group demand have been dropping.

The question is if the trajectory of this demand curve is now reversing course and bottoming out, or is group demand growth basically going to be flat for the foreseeable future. In other words, will we see noticeable increases in group travel with all the positive implication (such as better forward visibility that leads to optimism about the future and stronger pricing)? Time will tell. But with the continued absence of government group travelers and business travelers having found ways to do “more with less” throughout the recession we are not optimistic group demand will increase meaningfully.

2. How much ADR growth is possible?
STR’s 4.2% ADR forecast for 2014 and 2015 is just below the recession-free long-run average as shown in Table 2 above. The question is: Will revenue managers and GMs in 2014 use the continued strong demand environment as support to increase room rates above the long-run average?

It could happen if group demand increases and rooms on the books point at an overall stronger demand situation. Then again, as we saw in the last two years, continued demand growth is not necessarily a cure-all for ADR woes. More demand is generated by transient travelers, who traditionally book rooms much closer to the check-in date, making pricing decisions much more difficult.

Unknown unknowns
STR’s forecast update at the NYU International Hospitality Industry Investment Conference will take into consideration this latest thinking and available data. Obviously, none of the forecasts take into consideration an external shock to the system that would severely hamper or accelerate demand and ADR growth. We just don’t know what we don’t know.

The opinions expressed in this blog do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Bloggers published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.