BROOMFIELD, Colorado—Demand in the United States hotel industry is booming while supply growth remains low. As a result, national hotel occupancy levels are near all-time highs, which is impressive considering there are more hotel rooms in the U.S. than ever.
To put it in perspective, HNN’s sister company STR Analytics looked at the trailing three-month occupancy levels dating back to 1990. Of the 296 possible three-month periods, only 29 times has a three-month period exceeded a 70% occupancy level, or about 10% of the time.
Only four times have these occupancy levels matched or exceeded where the U.S. hotel industry sits as of August 2014. The current running three-month occupancy is the highest it's been since the summer of 1996, with the all-time peak occurring in the summer of 1995. Clearly, some three-month periods occur when national occupancy levels are naturally softer (winter), so to smooth this trend out we looked only at the three-month periods ending August since 1990.
Here it's clear to see the strength of the mid-90s, where occupancy records were broken. The cycles dip in 2001 and again much more dramatically in 2009, but the slope of recovery is steeper in the last few years than ever before.
Occupancy is the last major benchmark yet to achieve record levels, and usually it's a race an impending onslaught of new supply. However, in today's climate, new supply is subdued compared to what was on the books in 1995 and 1996, so it's quite possible the previous occupancy records will be broken.
Are there any other similarities between today's hotel market and in the summer of 1995, the peak of recorded three-month occupancy?
On a running three-month basis, occupancy levels are nearly the same, though clearly rates are much higher in 2014. What's interesting is that rate growth is stronger today when looking on a three-month basis, even considering inflation was nearly 100 basis points higher back in 1995. Taking that into account, nominal average-daily-rate growth for this period is double what it was for the same three-month period in 1995.
A key difference here is supply growth; it was nearly double back in 1995 to what it is today. The lack of supply growth has allowed the U.S. to sell out hotels, though that is slowly changing as more hotel projects enter the pipeline every day.
Unemployment was 500 basis points lower back in 1995 with gross-domestic-product growth much stronger, which makes the current uptick in today's ADR growth even more impressive. Mortgage rates were much higher back then (almost double), which directly affects disposable income. This could be one factor in explaining the softer rate growth in 1995.
Internet a hurdle
One potential hindrance to greater ADR growth in today's market? Look to the Internet. The stats above on the number of websites in existence is staggering, and consider back in 1995 the distribution channels for a hotel were extremely limited (mostly you had to call to make a reservation). Consumers didn't have the ease and ability to research hotel rates that they have now, which puts pressure on a hotelier's ability to increase those rates.
The mere existence of the Internet has allowed hoteliers to reach a limitless audience, but it also has trained consumers on how to get the best prices available at all times. It also allowed hotels a fast and easy way to slash rates in a downturn, which we have learned is much easier than building rates back up.
Another interesting statistic is the difference in national debt to GDP ratio between the two periods. According to the Treasury Department, the ratio stands at 99%, compared to 65% back in 1995. The higher percentage speaks to a more potentially fragile economy, which itself speaks to consumer confidence. There's no question that travel (especially leisure travel) is vulnerable to swings in consumer confidence (and in fact the Conference Board's Consumer Confidence Index is 92.4 for August 2014 compared to 102.4 in August 1995).
Overall, while there are some similarities from August 1995 to today's hotel climate, there's no question the greatest one is occupancy. Rather, the many differences (economic, consumer confidence, debt levels) suggest these are two very distinct periods of time, and it likely serves no good to project the next few years based on what happened in the mid- to late-90s.