2009 will likely rank as one of the worst years for the United States hospitality industry in modern history. Reeling from a sharp falloff in corporate, group and leisure travel demand as a result of the global financial crisis, hotel occupancies have been falling and hoteliers throughout the nation have been responding by lowering room rates to retain customers and shift share from competitors. The week of June 27, this drop off entered a dangerous new phase – when compared to the same week, year over year, the national hotel average room rate began to fall more rapidly on a percentage basis than the average hotel occupancy percentage. This trend has now continued over the past four weeks.
Hotel average rates are falling faster than occupancy rates - this could get ugly
Tracking the Average Daily Rate (ADR), Average Occupancy Percentage (Occ%) and Revenue per Available Room (RevPAR), based on weekly statistics published by Smith Travel Research (STR), over the last several years provides some insight into the how the recession is developing and the challenges that will face hotel owners and operators when a recovery begins to develop.
The US hotel industry is highly seasonal and some industry observers have mistakenly interpreted a June uptick in booking volumes as a signal that a bottom may have been reached and that if a recovery was not around the corner, at least the bleeding had subsided. Unfortunately, based on a review of 12-month moving averages, I cannot share that opinion. All three indicators, ADR, Occ% and RevPAR, on a 12-month moving average basis, have continued the slide that began months ago.
In early July, Smith Travel dramatically adjusted its forecast for 2009 hotel performance downward. Most significantly, full year RevPAR was forecast to fall 17.1%, a steep correction from the 9.8% decline predicted in STR’s April forecast for 2009 performance. In the press release, STR President Mark Lomanno commented “To a large degree, the industry is in a bit of a panic mode. People are only as strong as their weakest competitor in this environment, so when people are cutting and running, they feel compelled to join along. We think that’s going to linger.” These are strong words coming from a well respected organization that is normally known to describe hospitality industry market conditions from a “glass half-full” perspective.
In the interest of brevity, here is a fast synopsis of how we got to this point. Looking at the 12-month moving averages for the US hotel industry to smooth out seasonal fluctuations, property occupancy peaked during the week of October 6, 2007 at 63.99%. Average rates however continued to climb for the ensuing year, until the week ending September 27, 2008, when they reached $106.68. Due to the timing gap between the average rate and occupancy peaks, revenue per available room at peaked nearly 3 months earlier during the week of July 5, 2008 at $66.62. Simply put, this means the US hotel industry occupancy, in aggregate, has been declining for over 94 weeks since October 2007, rates have been dropping continuously for over 43 weeks since September 2008, and RevPAR has been falling for 55 weeks since July, 2008.
But the 12-month moving averages don’t tell the whole story, as such calculations can mask small glimmers of hope that might be reflected in the reporting of the weekly statistics. No such luck on that count. Since the 12-month moving average ADR peaked in September, 2008, there has been one lonely week (the one ending December 20, 2008) where all three benchmarks (ADR, Occ% & RevPAR) did not decline. That is 41 out of 42 weeks where there were declines in every measure of aggregate US hotel performance compared to the corresponding week the previous year. These are not healthy trends.
So how much ground has the industry lost? Let’s look at the latest week ending July 18, 2009 (week 29) as an example:
2009 Occ% / ADR / RevPAR = 66.2% / $ 97.33 / $64.41
2008 Occ% / ADR / RevPAR = 72.2% / $107.64 / $77.67
2007 Occ% / ADR / RevPAR = 76.1% / $104.83 / $79.79
2006 Occ% / ADR / RevPAR = 76.4% / $ 98.11 / $74.99
It is bad enough that the US aggregate occupancy percentage was 6 pts. higher and the average rate over $10 higher at this time last year, but even more painful is the fact that the industry has now given back all the average rate increases attained over the last three years. Sadly, in week 29 of 2006, the US aggregate occupancy percentage was over 10 pts higher and the average rate was $0.88 higher. Understanding that it took US hotel until 2006 to make up for the average rate losses sustained following the 9/11 terrorist attacks, this is sobering news.
If you are not already depressed enough, please keep reading… We have now entered a new phase of the recession. If we look over the period dating back to this time in 2006, there were only five out of 157 possible weeks when the year over year change in the average rate fell further than the change in occupancy on a percentage basis. Over that period, these declines never sustained for more than a single week. That was however, until the week ending June 7, 2009 when we started to see average rates declining at a more rapid rate than occupancy percentages for four consecutive weeks. What this means is that despite rolling rate levels back three years, hoteliers appear to be collectively accelerating rate reductions in an effort to arrest the slide in occupancy.
In the coming months, some may be inclined to comment that year over year room occupancy and average rate declines are moderating, however one must understand that during the second half of 2008, the industry started seeing dramatic declines in Occ%, ADR and RevPAR compared with 2007, so declines in the 2009 figures, while perhaps smaller, will be compounding the previous year’s declines and working from a lower base.
Being a relatively pragmatic person and having misplaced my crystal ball years ago, I will take a cautious approach and simply keep evaluating the weekly numbers to see what is happening with actual industry performance. I will let you know when I see the industry reaching a bottom – I will be looking for something like four consecutive weeks where the 12-month moving average for RevPAR holds steady – at this point I would actually be willing to take any of the three metrics holding steady for a month…
Smith Travel has kindly promised to provide updated forecasts on a monthly basis moving forward, so we can look forward to their prognostications on the future. I am not being sarcastic – the STR folks are the best at what they do, and it is a difficult, thankless job. I have to agree with Mr. Lomanno that the rate cutting trend may “linger” – hotels trying to regain competitive pricing equilibrium with consumers and businesses facing a the necessity of de-leveraging their lifestyles will be a challenge.
Please, someone write a comment and punch holes my analysis full of holes. I would never be happier than to be proven completely wrong on this topic.