U.S. hotel revenue per available room declined 2.2% in March, marking the first year-over-year RevPAR loss of the post-pandemic era.
The decline was not completely unexpected. U.S. hotel occupancy has declined year-over-year for 12 consecutive months now, decreasing 2.5% relative to March 2023. One year of no or low demand growth finally took its toll. Average daily rate, the industry’s saving grace over the past year, struggled to move the needle in March, rising just 0.4% ahead of the ADR level from a year ago.
Through most of 2023, the explanation for the U.S. hotel performance decline was much less dramatic: Lopsided demand recovery in 2022 led to equally lopsided year-over-year growth in 2023 as the industry finished righting itself post-pandemic.
Occupancy declines started on weekends, which is a logical loss given the revenge travel that characterized 2022. Yet even as declines migrated to weekday occupancy — which never reached the dizzying highs that weekends did — overall industry occupancy typically fell by less than one percentage point each month, alleviating concerns.
At the same time, moderate ADR growth more than offset demand deficits, and the continued ability to drive rates despite economic doomsaying helped bolster industry optimism and RevPAR growth.
Industry normalization might have been underway, but the post-pandemic party continued through 2023. It’s only moving into 2024 that the hangover has started to settle in, with growing variance in class-level and market performance suggesting that the industry slowdown has started to evolve into something new.
Clash of the Classes
Economy hotel occupancy started falling in April 2022, but the declines were understandable. The segment outperformed during the pandemic, and even as demand declines worsened, significant drops in segment supply explained away much of the loss.
However, almost one year later in March 2023, midscale hotel occupancy started falling as well, and only four months after that, upper midscale joined the trend.
Occupancy declines have continued to slowly creep up the class spectrum, with upscale occupancy down beginning December 2023.
With the speed and size of occupancy declines accelerating through the classes, industry normalization no longer fully explains the phenomenon. All classes continue to report year-over-year declines in weekend occupancy through the first quarter, but only luxury through upscale classes have grown weekday occupancy. A general decline in overall leisure travel and increased selectivity in business travel appears likely.
The split in performance trends between segment parts is not confined to class. Market-level performance trends have likewise diverged, with market size a major factor in determining the strength of demand.
Market Moves
The top 25 U.S. hotel markets recorded a stellar 2023, reporting growth across all three key performance indicators and respectable 8.4% RevPAR growth relative to 2022. But the other 147 markets did not fare so well. While 2023 RevPAR rose 2.3% for non-top 25 markets, occupancy declined 0.6%, with demand persistently down year over year beginning in April 2023.
Day of week occupancy trends provide additional insight to the shifting demand patterns. Top 25 midweek occupancy continues to grow, despite a difficult March comparison caused by the Easter holiday shift. Weekday occupancy among all other markets, however, has declined for three consecutive quarters.
Weekend occupancy has persistently declined among all markets, although the top 25 market decline is less than half of the other markets’ loss. As revenge travel ended, then, the top 25 markets continued to draw some degree of leisure demand but — more importantly — found success in corporate and group travel that smaller markets struggled to capture.
Rates Just Rise
Whether it’s day-of-week, class segments or market-level, ADR has been moderately more resilient, although demand slowdown has started to affect hoteliers' pricing power.
Rate growth has largely decelerated over the past 12 months, beginning as a much-needed return to ‘normal,’ single-digit ADR growth across all segments of performance. That has shifted over the past few quarters, with the same fractures in performance so visible in demand starting to filter through to ADR.
While luxury and upper upscale rate growth has been modest but consistent for the past two quarters, upscale and upper midscale hotels report decelerating growth and midscale and economy rates have fallen year over year over the same period.
Likewise, top 25 market ADR growth has outpaced all other markets for the past 11 months, with the shifting Easter holiday causing a blip in March.
Day-of-week ADR growth is the only segment in which a split isn’t immediately evident. Midweek and weekend ADR continues to grow at roughly the same pace each month, excluding holiday shifts.
A Price-Conscious Consumer
The U.S. hotel industry continues to stubbornly drive rate, even as occupancy among lower-tier hotels and smaller markets has fallen off, and therein lies the answer to much of 2024’s softer demand. The picture points to an increasingly price-conscious and selective domestic leisure traveler, one looking to be much more discerning with travel plans given the continued rise in room rates.
The latest economic data supports this as well. Credit card debt has increased by more than 12% year-over-year for the last seven quarters, according to the Federal Reserve. What's more, the percent of credit card loans that are “seriously delinquent” — meaning 90 or more days delinquent — is at its highest level since mid-2011.
Corporate travel has remained more resilient, although the top 25 markets maintain a clear edge over other markets in capturing that demand.
STR’s Forward STAR data suggests that markets with stronger corporate demand bases will do well in the months to come.
Kelsey Fenerty is a senior analyst at STR, CoStar's hospitality analytics firm.
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