Hotels are doing better than ever. More rooms have been occupied in 2018 at higher rents than ever before.
“We are at peak performance—and we don’t expect that to change much,” says Jan Freitag, senior vice president of lodging insights for research firm STR.
Hotel owners still worry about the rising costs to operate their businesses, however. Even though the average revenue produced by hotel rooms is likely to keep rising, room rates are not growing as quickly as the cost of operations.
“The name of the game is cost control,” says Freitag.
Demand for hotel rooms is still rising
Hotel rooms are full in cities and towns across the United States. Occupancy rates reached a cyclical high in 2018, according to Robin Trantham, a consultant with research firm CoStar Portfolio Strategy.
Over the 12 months that ended in September, occupancy across the U.S. averaged 66.7 percent. “We are selling two out of three rooms all year,” says Freitag. “We are at the strongest demand level ever.”
Hotel room rates also continues to rise steadily. The average daily rate (ADR) rose 1.9 percent over the 12 months that ended in September 2018, according to STR. But, “the room rates are not growing a fast as the consumer price index,” says Freitag. The most recent information on hotel expenses, from 2017, also shows that the cost to operate a hotel room grew more quickly than the ADR.
Labor costs are one of the budget lines growing most quickly. With the unemployment rate in the U.S. close to 4.0 percent, workers have many choices. Hotel operators have to work hard to keep talented employees, either by offering an attractive workplace culture, perk and benefits or simply a larger paycheck.
Occupancy rates are highest—in the mid-70 percent range—in primary markets and at super luxury hotels. It’s difficult for a hotel to book more than 75 percent of its rooms once low traffic days like Sundays are included in the average.
Strong outlook for the future
Demand for hotel rooms is likely to stay strong as long as the U.S. economy continues to grow. The total number of rooms rented grew by 2.5 percent over the 12 months that ended in September. Over the same period, the total number of hotel rooms grew by just 2.0 percent.
As long at the demand for rooms keeps growing more quickly than the number of rooms, occupancy rates and rental rates will continues to push higher. “Over the next couple years, we should see supply growth begin to cool down a bit, as construction costs continue go up,” says Trantham.
Developers now have fewer rooms under construction than they did at this time last year, and the outlook continues to improve. “Over nine of the last 11 months, the number of rooms under construction has declined,” say Freitag.
The U.S. economy is also helping to fill hotel rooms, with continued growth in household incomes and corporate profits and lower travel costs. “Hotel demand has been incredibly strong recently,” says Trantham.
Houston distorts the data
The revenue produced by an average hotel room shrank in September for the first time compared to the year before since the start of this cycle’s recovery period. But the drop was caused by the decrease in demand for hotel rooms in just one city: Houston, which saw skewed numbers after being it by Hurricane Harvey in the fall of 2017.
“If you exclude Houston, revPAR growth was positive in September,” says Freitag.
Hotels have been earning more money every quarter since the start of the recovery. The revPAR rose for eight-and-a-half years (102 months), after the Great Recession. That winning streak finally ended in September 2018, when revPAR shrank by 0.3 percent compared to the year before.
It’s a small decline that was caused almost entirely by shrinking demand for hotel rooms in Houston. About a year ago, Houston’s hotel rooms were packed with people who had been forced out of their homes by Hurricane Harvey. Those people have since been able to find more permanent places to live and demand for hotel rooms in the city returned to its normal level.
Experts expect more distortions in the data as storms jolt cities like Houston more often. “The data is going to be harder to interpret as climate makes things more volatile,” says Freitag.