In a review of hotel performance since the Great Recession, signs are clear that after years of high and steady revenue-per-available-room growth, the U.S. hotel industry is now seeing a national slowdown.

In her opening presentation of “Setting the stage: U.S. hotel performance overview” at the 2019 Hotel Data Conference, Vail Ross, SVP of global business development and marketing at STR, explained that while the industry continues to see positive results, the slowing performance appears to be here to stay. STR is the parent company of Hotel News Now.

Supply and demand

Hotel construction has long been the topic of conversation, she said. June numbers show more than 202,000 rooms in construction in the U.S., a difference of about 9,000 rooms from the previous peak in December 2007. In July, there were more than 205,000 rooms under construction, closing the distance with that peak even more.

The approximately 55,000 rooms that have opened so far in 2019 represent 494 hotels, Ross said. In 2014, the hotel industry had a long-term average of closing about 35,000 rooms a year, but that has dropped to about 25,000 rooms a year. Year to date, the industry has closed 8,224 rooms, she said.

“If you do the math and the latter part of 2019 performs similarly in the amount of rooms that close, it’s going to be under that 25,000,” she said.

The period of July 2010 through May 2019 was the longest stretch of Hotel Data Conference history that saw demand outpace supply, Ross said. The two are now growing at the same pace.

Year to year, the variation of demand growth to supply is not aligned, she said. The long-term average of supply growth is 1.2% and demand is 1.5%. The two are now at equal paths, so the question is when the industry will reach that tipping point, she said.

The 20-year average alignment of supply and demand growth from an occupancy standpoint equates to 0.3%, she said. There was a greater difference coming out of the downturn of 2009, and while there was a blip in 2016, it returned in 2017 and 2018.

Year to date, occupancy growth has essentially flatlined at 1% with occupancy levels hovering just below 66%, Ross said. As the industry is a street-corner business, some markets are faring better than others. Many of the markets seeing occupancy declines are in the top 25 markets. Seventeen of the top 25 markets are experiencing occupancy declines, and of those, nine are having average-daily-rate issues, she said.

Weak pricing power

The national long-term average for ADR growth is 2.4%, and the industry hasn’t seen consistent growth in this metric since 2016, Ross said. Year to date, ADR has grown 1.1%.

When accounting for inflation, the hotel industry has seen four quarters of negative ADR growth, she said. There’s been a full year in which occupancy has not had a positive impact on ADR when adjusting for inflation.

“That 2.4% is definitely not going to be enough going forward,” she said.

Lately U.S. hoteliers have not had the pricing power they should have given the industry’s environment, Ross said. However, there is one area that still comes into play: Group business still has the ability to drive pricing, particularly through compression nights. Compression nights can be defined as having greater than 90% occupancy or greater than 95% occupancy, she said. There was a large bump in compression nights coming out of 2010, but those became rarer after 2015.

The amount of group business can have a positive effect on compression nights, she said. However, looking at the upscale and upper-upscale classes, each have seen declines of more than 10% in compression nights since 2014.

The top five U.S. markets that had compression nights in 2018 were New York (186), the Florida Keys (104), San Francisco/San Mateo (104), San Jose/Santa Cruz (82) and Boston (75). The differences among these markets shows there are numerous factors that play into compression nights, Ross said.

“There’s really no one thing we can point to to say that’s going to be a driver of compression nights,” she said.

The 2019 HOST Almanac reported that total revenue was up 2.9%, a little higher than the overall rooms revenue at 2.4%, Ross said. The division with the strongest gains was “miscellaneous,” which includes cancellation fees and resort fees.

On the expense side, labor was the greatest cost, growing by 4% in 2018, she said. This is the third year that labor costs have grown faster than overall revenue growth, she said.

“The industry remains profitable, but those margins are becoming smaller,” she said.