Hotel Sector Performance Slows
The hotel sector outperformed most asset classes through the current expansion, but its first quarter performance raises concern, analysts say.
STR, Hendersonville, Tenn., reported that seasonally adjusted room demand declined 0.9 percent in the first quarter, the first outright contraction since the recovery began. This left room demand just one percent higher than a year ago, its slowest growth rate of the expansion.
Wells Fargo Securities Senior Economist Anika Khan noted that the first quarter posted the lowest year-over-year revenue per available room reading since early 2010. “With occupancy likely reaching a peak last year and average daily room rate growth moderating, it is understandable that investors are asking how much longer the current hotel cycle will last,” she said.
Ten-X Research Quantitative Strategist Chris Muoio called the first quarter “concerning” and said it bears watching to see if the dip will be temporary or a sign of something more serious.
“Though, we wonder if Airbnb is now pulling hotel demand away from traditional outlets and muddying the correlation between economic growth and traditional hotel fundamentals,” Muoio said. “Whether demand is downshifting entirely or spreading out between traditional hotels and Airbnb, it is clear that operating fundamentals are shifting from a robust expansion into a more muted phase.”
Muoio noted that with new hotel supply poised to accelerate, the sector requires an uptick in demand to prevent market fundamentals from eroding. “This will prove impossible in some markets like New York City and Washington, D.C., though, which face particularly heavy supply pipelines,” he said.
Khan said the hotel sector experienced two cycles since 1990, both of which followed a fairly predictable path. “Once occupancy peaks, ADR growth does the heavy lifting for overall real RevPAR growth, with the sector continuing to advance,” she said.
During the previous cycle the occupancy rate peaked in early 2006 and real RevPAR growth continued for almost two years due to room rate growth, Khan said. “We expect a similar result during the current cycle; however, the pace of real ADR growth is slowing much faster than expected. Some have pointed to the strong dollar to explain the faster deceleration in ADR growth; however, empirical evidence suggests that the variance in ADR growth can barely be explained by the dollar.”
Khan called a slowdown in lower-end hotel’s real RevPAR growth “another tell-tale sign the hotel sector is nearing the end of the cycle.”
Wells Fargo Securities examined broad measures of U.S. economic activity including real GDP, real final sales, employment, the broad trade-weighted dollar index and the Leading Economic Index to predict real RevPAR growth. “With these broad measures of economic activity still posting positive gains, we expect real RevPAR growth to continue to grow in the coming quarters driven by real ADR growth, but the pace of the moderation in real ADR growth bears watching,” Khan said.
