BROOMFIELD, Colorado—Upper-midscale and upscale brands represent 62% of the confirmed pipeline in the United States, according to STR data. With such strong development interest in these two scales, STR Analytics examined how new hotels in the upper-midscale and upscale classes have performed through the previous two development cycles, and whether it can be inferred as to when it's the best time to build within a cycle. This is a follow up to our previous analysis of all new hotel openings in the top 25 markets since 1994. (STR is the parent company and STR Analytics is the sister company of Hotel News Now.)
We used the same methodology by dividing each cycle into quartiles based on length of the entire period. Then we looked at each individual hotel’s revenue-per-available-room performance for the first 24 months after opening, indexing performance against market class.
This article describes the aggregated results for upper-midscale and upscale class properties during the four quartiles of each cycle.
1994-2001: New supply is welcome, ramping up quickly
For the expansion period of 1994 through 2001, hotels in the first quartile showed significantly better performance compared to those that opened later. The ramp-up period was fast, with hotels reaching an average RevPAR index of 128.3% within the first three months of operation.
Overall, for the 24-month period, the average RevPAR index was 122.9% for hotels opening in the first quartile, which is about 25 percentage points higher than any of the other quartiles. Compared to our previous analysis of all hotels, upper-midscale and upscale hotels opening in the second and third quartiles had a longer ramp-up period, about 14 months. Over the full 24- month period, the average RevPAR index was actually slightly below the market class performance: 95.4% for the second quartile and 96.4% for the third quartile. Hotels opening in the fourth quartile enjoyed stronger performance overall, thus concluding it was better to open first or last in this cycle.
2002-2009: Existing supply puts up a fight
For the expansion period of 2002 through 2009, the ramp-up time of new hotels increased.
The average ramp-up time of hotels in the first through third quartiles was seven months, and hotels opening in the fourth quartile took a full year to surpass the performance of their respective market classes. Hotels opening in the first quartile still outperformed overall with an average RevPAR index of 105.5%, but there was much less variance between the quartiles, as evidenced by the characteristics of the chart below.
2010 and beyond: The pipeline indicates more growth ahead
There is always much debate about where the industry is in the cycle. As we had mentioned in our previous article, it is not possible to make an accurate prediction about when the current cycle will end. However, we do know there is continued development on the horizon for these two classes.
The graph below shows the number of rooms opened by year within the upper-midscale and upscale classes, including those in the pipeline phases of in construction or final planning.
Hotel development for upper-midscale and upscale classes looks promising regardless of where we are in the cycle. The number of hotel rooms introduced to the market has consistently increased from one peak season to another, which in turn can continue slowing down the ramp-up times for the newcomers.
Moreover, the overall performance for the first two years has become more uniform from one cycle to the other, thus the quartile in which a hotel opens might not pose a big difference in the current cycle.