NASHVILLE, Tennessee — Big cities are having a big moment in the U.S. in 2023.
Compared to last year, hotel performance metrics in the top 25 largest cities are all surging back. Hotel occupancy, average daily rate and revenue per available room are all higher.
But as STR senior analyst M. Brian Riley pointed out during a presentation at the Hotel Data Conference, "the reason why it’s high this year is because last year it wasn't. It's all coming back to normal."
STR, CoStar's hospitality analytics firm, and partner Tourism Economics have forecast greater growth in the top 25 markets than elsewhere in the U.S. for this year and through 2025.
For full-year 2023, top 25 market revenue per available room is forecast to increase 7.8% over 2022. Outside of the top 25, that increase is forecast at 1.8%. The gap in the forecast is narrower for 2024 — 6.4% growth in the top 25 versus 1.9% outside. Growth is expected to slow again in 2025, with top 25 year-over-year RevPAR growth projected at 4.5%, and 2.6% growth projected elsewhere.
Smaller cities — non-metropolitan markets — recovered faster from the COVID-19 pandemic, so they had their time to shine in 2022.
"They were more or less back to 2019 demand levels by 2022," Riley said. "For non-metros … this is the year of actually slowing down. It's still a great year for non-metros on aggregate. Their demand and occupancy are really close to 2019."
Hotel revenue growth in the smaller cities is also exceeding inflation. That's not yet the case in the top 25, where rates are 16% above 2019 levels, and the "magic number" to beat inflation, for most of this year, has been 19%, Riley said.
Demand for hotels and occupancy in the top 25 markets are rising, but are not yet back to pre-pandemic levels. Hotels in those markets are selling 3% fewer rooms than they did in 2019, and the supply of hotel rooms has grown by 4%. That translates to 7% lower occupancy.
"There are 5.9 million rooms in the U.S. that need to be sold to be 100% occupied. The top 25 markets are the heavyweights … they make up 35% of the rooms in the U.S.," Riley said.
Hotel supply growth of 4% is "not fast growth ... but it is growth," Riley said. "What it does is it raises the bar for occupancy that you need to meet past performance."
But there is a lot in the data to celebrate for hotels in the top 25 markets, Riley said.
For one, hotel development is slowing down — and that's good news for existing hotels in the top 25 markets.
"No one wants to be competing against hotels. Construction has decreased — and that's decreases across all all sizes of cities from big cities, biggest cities, secondary cities, as well as non-metros. The pipeline has gotten smaller, but it does exist," Riley said.
He cited New York City as an example. The market "has a volume in construction of 9,000 rooms, which for a market of that size is not highly concerning," he said.
Also, weekday demand — which is "a proxy for business travel" — has improved drastically in the past year, he said.
Only two of the top 25 markets are negative year over year on weekday demand, "but they’re the ones you would expect, like Miami," Riley said. "New Orleans is going negative only because of a stronger 2022 … but it’s performing very similar to 2019."
Transient demand for hotels — from individual travelers who typically book rooms for one to two nights — is "still breaking records," he said. Group bookings are also on the rise.
"Transient is the best it’s ever been. Group is better than last year, but not by much. We actually did have a group season — February and March — unlike last year," he said.
Finally, the big-city hotel markets are experiencing "a comeback in compression," Riley said.
Compression nights are when hotels are nearly fully booked — typically 90% to 95% occupancy — and that puts pressure on rates.
"Markets make the biggest profits when they have the most rooms filled," Riley said. "Taylor Swift comes to town; you’re going to be compressed."
The frequency of compression nights is higher, "but it’s nothing like it was in the golden years. It is cyclical, but I do think the trajectory is good," he said.