Market Report: Phoenix

PHOENIX—Imprinted in the red-rocked basin of the Salt River Valley, Phoenix, Arizona, has emerged as an affable escape from the cold winter months for leisure travelers throughout the U.S. Not surprisingly, the market’s strength of season is January through mid-April, when sun-deprived tourists flock to 70-plus-degree weather to take in spring training professional baseball games, golf and a bevy of first-rate sporting events hosted at the recently constructed University of Phoenix Stadium.

This high-season falls within the first-quarter financial window, offering a clear historical perspective of how the market performs when running at peak capacity. 

*values in U.S. dollars
Source: Smith Travel Research For the rest of the year, industry performance typically tapers off, bottoming out in July when the temperature routinely simmers above 100 degrees Fahrenheit (37.8 degrees Celsius). Performance rebounds slightly as travelers begin to return in the autumn months before dipping again in December.

Phoenix showed the signs of downward performance earlier than the U.S. industry average. Although the market’s metrics were higher than the industry average, occupancy and revenue per available room for first quarter 2008 declined at a faster rate.

*values in U.S. dollars
Source: Smith Travel Research Furthermore, last year’s first quarter results received an extra boost as the market hosted Super Bowl XLII on 3 February. Average daily rate and RevPAR increased noticeably for the month, up 18.0 percent (to US$172.79, a record for the market) and 16.5 percent (to US$135.05), respectively.

Occupancy during past downturns

Heading into the 1991/1992 downturn, occupancy had peaked at 86.5 percent in March 1990. It bottomed out four months later at 45.6 percent, and posted negative returns in 1991 with a yearly decline of -2.8 percent. By 1992, the metric showed some growth (+1.3 percent), and by March 1993, occupancy had again surpassed 86 percent (to 86.2 percent).

The 9/11 downturn was shorter, yet the impact was a more pronounced. Occupancy declined 25.3 percent in September 2001 alone, and didn’t post positive growth for 12 months (+18.5 percent in September 2002).

ADR during past downturns

Like occupancy, Phoenix’s ADR peaked in March 1990 at US$86.84 heading into the 1991/1992 downturn. Despite a brief rebound the following year, when ADR climbed as high as US$83.67 in March, annual ADR growth didn’t return until 1992, during which time rates increased to a high of US$87.32 in March.

Whereas occupancy recovered relatively quickly after 9/11, it took ADR four years to recover in the Phoenix market. Rate peaked in 2001 at US$126.68 in March, and it didn’t climb above US$125 until March 2005, when it reached US$129.86.

The current crisis

With the region’s peak season stunted by the current financial crisis, hoteliers are digging in with a more aggressive approach toward a historically challenging summer season. 

Best Western Tempe by the Mall

“The market here is so used to sitting back and collecting money (January through April), and that didn’t happen this year,” said Rich Schnakenber, co-owner of the Best Western Tempe by the Mall. “You’re going to have to be more aggressive. … We’re spending more on marketing than we did last year.”

Much of that effort is going beyond attracting repeat customers, who don’t provide enough business to be successful in the market, the owner said. Instead, Schnakenber is trying to attract new travelers to his 158-room property, especially corporate travelers who are trading down. He also is working closely with the city’s chambers and convention bureau to get more exposure, as well as using Best Western’s central reservations systems, which produces about 26 percent of the hotel’s business.

Marcia McDowell, GM of the Days Hotel Mesa Country Club, has adopted a similarly aggressive approach.

“We’re trying to think outside the box and go after new business,” she said. “I’m definitely targeting the tour bus business, which hasn’t been here before—this would be a perfect property for that.”

Embassy Suites Phoenix/Tempe

Jeff Preston is trimming operating expenses at the Embassy Suites Phoenix/Tempe to combat the effects of the downturn.

“We are evaluating our entire expense structure for efficiencies,” the GM said. “This has produced the use of more productive housekeeping methods and the creation of complexing, which is the combining of resources between two or more sister properties to achieve mutual cost savings and efficiencies. This process hopefully will not only help in the short term, but also in the long run with increased profitability once the market turns around.”

All three GMs admitted competitive pressure on rates, though their responses were varied. Schnakenber and Preston said they have tried to maintain rate at their properties, while McDowell admitted to following the discounting trend of her competitive set.

These and other tactics have yielded mixed results. McDowell, who juggles marketing and managing at the Days Hotel, admitted that despite her efforts, her property is still struggling.

“Even spring training in March, that’s when we’re supposed to be sold out everyday—we weren’t even close to being 60 percent for the whole month,” she said.

Schnakenber, on the other hand, has slowed declining performance significantly during the past three months—a pattern that mirrored the market’s performance as a whole.

*values in U.S. dollars
Source: Smith Travel Research Other challenges

Despite the city’s growth in size and population during the past five years, Phoenix’s hotel supply had seemingly peaked in 2004, when 404 total properties comprised 54,304 rooms. Those numbers declined slightly for the next few years before rebounding again by 2008.

Source: Smith Travel Research While the timing of that rebound makes sense given the arrival of Super Bowl XLII as well as a nationwide boom in construction and development that had begun a few years earlier, the uptick’s correlation with the economic crisis has made for an especially difficult environment, with too many rooms chasing too few guests.

Established properties operated by smart people are going to do all right, but some of the newer properties, mainly on the west side (where much of the new construction has been concentrated), are going to struggle this summer, Schnakenber said.

Unfortunately, there doesn’t appear to be any letting up. There were 416 hotels representing 57,345 rooms in February of this year, and 105 additional properties comprising 12,973 rooms in the total active pipeline, according to STR/TWR/Dodge. There likely will be some attrition as projects get put on hold because of a lack of financing, but the next year will undoubtedly prove challenging.

David Schmid, who’s overseeing development of two properties in the area as VP of development for Five Star Development, still is optimistic about the long-term prospects of the market.

“Tourist, business, and independent travelers will continue to seek out Arizona, and not just because of our great winter climate either,” he said. “Our desert environment, Southwest culture, special events, shopping, spas, sports, entertainment, golf, and eco-tourism, are also principal drivers of our local resort and hotel business.”

Lou Wolff, chairman and CEO of Wolff Urban Development, also is bullish on the market’s economic potential, though he jokingly expressed remorse that his Hyatt Place Phoenix Mesa had opened on schedule.

But perhaps the greatest test for the Phoenix market will present itself in the coming months. June, July and August always have been the most difficult time of year, and with industry analysts predicting difficulties at least through the second quarter, if not the rest of the year, it’s likely the worst has yet to come.