Abstract
In virtually every category, 2011 was a successful year for the U.S. hotel industry, and if early indicators are correct, 2012 should reap similar results.
Across a variety of indicators, industry segments, and markets, the numbers look good. Room supply growth for the U.S. hotel industry has been drifting downward and ended the year only 0.6 percent higher than 2010. This was the lowest number of additions to room supply since 2005 and well below the long-term compound average growth rate in supply of 1.8 percent.
While supply growth was slowing, room demand growth surged throughout the year and ended 2011 with a 5.0 percent increase. This follows a 7.3 percent increase in demand during 2010 as the industry rebounded from the recession. The only other year that demand growth exceeded 5.0 percent on an annual basis since STR began tracking the industry’s performance was in 1989, when demand grew by 5.2 percent. Combining these two trends of lower supply growth and higher demand growth enabled the industry to boost occupancy by 4.4 percent during 2011—the second-largest improvement in occupancy since 1987, and exceeded only by last year’s 5.5 percent occupancy gain.
With higher room demand and occupancy, the industry was able to achieve an above-average increase in room rates of 3.7 percent during 2011. While this was the strongest improvement in room rates since 2007, it still fell below the improvement in occupancy for the second year in a row. Before 2010, room rate gains always exceeded occupancy gains. And now, for the second straight year, that failed to happen.
With solid gains in occupancy and room rates, revenue per available room (RevPAR) grew 8.2 percent in 2011, the second highest improvement in this key measure since STR began collecting industry data. In the mid-2000s, the industry had some truly impressive RevPAR gains, with an increase of 8.0 percent in 2004, an 8.6 percent rise in 2005, and a 7.7 percent jump in 2006. Because of the depth of the declines during the last recession, the industry will need to string together comparable RevPAR gains over the next two years if it is to get back to prerecession performance metrics.
The rebound in 2011 was somewhat uneven across the chain-scale segments. Luxury properties achieved a RevPAR increase of 11.2 percent, while economy properties grew RevPAR by only 6.0 percent. The upper upscale properties reported a 6.6 percent improvement in RevPAR, while properties in the midscale segment boosted RevPAR by only 3.0 percent. The primary contributor to RevPAR gains for the luxury and upper upscale segment was room-rate increases, while occupancy improvement was the primary contributor for all of the other major scale segments.
The only chain-scale segment that experienced a decline in any of the key performance metrics was the midscale segment, where room rates declined by 0.5 percent during the year. This is somewhat of an anomaly as the data are shifting because of the conversions of Best Western properties to that brand’s new Plus and Premier tiers. This reclassification of some of Best Western’s properties has caused some distortion in the midprice scale segment’s performance results.
By location, resort properties experienced the highest improvement in RevPAR, with a 9.8 percent increase. Suburban properties had a healthy gain of 8.4 percent. The RevPAR gains for the resort hotels were fueled largely by a 5.0 percent increase in room rates. Urban properties also reported a 5.0 percent increase in room rates, but their occupancy gain was only 3.1 percent compared with a gain of 4.7 percent for the resort properties.
Occupancy growth was the primary driver for RevPAR gains for all of the other location segments, with room rates falling below the industry average for properties located in the small metro/town group (up 2.2 percent) and those located along interstates (up 2.6 percent). Supply growth was not a factor for most of the location segments. The exception was urban properties. With a supply growth of 1.4 percent during 2011, a few key urban markets managed to add considerably to their existing room inventories.
New York City was perhaps the most interesting market to watch during 2011. Even though the number of room-nights sold in that market rose by 6.0 percent during the year, room supply grew by 5.5 percent, resulting in an occupancy gain of only 0.5 percent. With only modest improvement in occupancy, properties in this market were able to add another 5.5 percent to their pricing.
While that was a solid improvement in room rates for New York, it was well below the 13.9 percent increase in room rates for properties in San Francisco and the 10.0 percent jump in rates on Oahu Island, Hawaii. The only top-25 market that failed to report an increase in occupancy during 2011 was New Orleans, where occupancy declined by 0.4 percent. Also, only two markets reported a decline in room rates during the year. Properties in Atlanta dropped their rates by 0.4 percent and those in Norfolk–Virginia Beach, Virginia, experienced a 0.3 percent decline.
There were a number of markets where RevPAR increased at double-digit levels. San Francisco led the way with RevPAR increases of nearly 20 percent. Properties in the Washington, D.C., market reported the lowest increase in RevPAR for the year, up only 1.5 percent. The Nashville market (STR’s home base) showed the second highest increase in room supply as the market rebounded from the property closings caused by the Great Flood of spring 2010.
In reviewing the demand segments, there was a fairly consistent bifurcation between transient business and group business. Transient demand began 2011 well ahead of last year— and it is important to note that it also was well ahead of the previous record year of 2007. However, group demand, which never really declined that much during this recession, failed to grow much at all during 2011 and is still below the peak period of 2007. Room rates for both segments showed modest improvement during 2011 but are still well below the peak years. Of particular concern is the future impact of group room rates. Since group rates continue to be depressed, it has been particularly difficult to negotiate future increases, and as a result, we expect group rates to be a drag on overall rate improvement during 2012.
The current outlook for 2012 is fairly optimistic given the continuing difficulties we see on the horizon. While we are all aware of the obvious issues—continuing high levels of unemployment, a busted housing market, soaring deficits, and sovereign debt issues in Europe—it is the apparent fragility of the economic rebound that is the biggest problem. Any shock to the system might be sufficient to cause a slowdown in the global economy. While the timing and severity of any unexpected event is hard to quantify, in today’s uncertain economic environment, some type of shock is almost guaranteed. So with the usual caveats in mind, we are currently forecasting a 0.8 percent increase in room supply and a 1.3 percent in room demand. This should yield about a 0.5 percent improvement in occupancy. Room rates have been particularly hard to forecast, but we expect rates to increase by 3.8 percent in 2012. We are currently forecasting RevPAR to increase by 4.3 percent during the year.
With the industry coming off a better-than-expected year for room demand and other key indicators, the belief is that the travelers who did take trips in 2011 will continue that pattern this year. If that is indeed the case, it will create further stability for the U.S. hotel industry during 2012.