NASHVILLE, Tennessee—At US$1.6 billion in annual room revenue, Atlanta ranks as the ninth largest U.S. market (excluding Las Vegas). Traditionally viewed as a business-travel dominated market, Atlanta’s average annual revenue per available room growth was nearly 8.5 percent from 2004 to 2007, driven primarily by average daily rate growth. Demand (roomnights sold) and occupancy performance began to soften in the second half of 2006 and has remained fairly weak since then. Recent room supply growth in the market has been below trend significantly, averaging just more than 0.3 percent annually from 2002 to 2008.
Atlanta’s June 2009 year-to-date performance reflects the sharp reduction of premium-rated corporate transient and group business. Occupancy declined nearly 14 percent while ADR fell 7.4 percent, resulting in sharply lower RevPAR—which was down a whopping 20.3 percent. Travel on business dominated weekdays (Sunday through Thursday) has been hit the hardest, with occupancy down 16.4 percent and room rate off 7.5 percent. Leisure travel also has declined, with weekend occupancy down 7.8 percent and room rate lower by 5.8 percent.
Atlanta’s recent problems have stemmed primarily from declining demand. Demand fell in 34 of the past the 42 months from January 2006 through June 2009. During that same period, average room rates only declined in 10 months, including the first six months of 2009. Declining occupancy definitely slowed room rate growth, but hotel operators were able to increase room rates in the face of soft demand and slowing occupancy for almost three years. That stretch of gravity-defying rate growth, combined with the financial market meltdown and recession, resulted in significant rate declines during the past six months. Rate growth likely will present a significant challenge to Atlanta’s hotel operators for the balance of 2009 and into 2010.
Room supply growth also likely will present challenges in the next 12 to 18 months. While supply increases have been muted for the past three years, June 2009 year-to-date supply increased 1.5 percent—the largest supply year-to-date supply increase since 2002. Moreover, rooms currently under construction in the Atlanta market account for 3.7 percent of existing supply. Seventy percent of these rooms are in Smith Travel Reseach’s luxury, upper upscale and upscale segments, which predominantly serve business travelers.
The unknown with hotel rooms currently under construction is how many of these projects will open, and will some hotel openings be delayed? Historically, 95 percent of under-construction rooms tracked in Smith Travel Research’s pipeline database have opened ultimately. The construction pace has slowed on some projects, based on the difficult economy. Some projects could be completed and “mothballed” until operating conditions improve. However this plays out, it’s clear new room supply in the market will be an unwelcome sight for existing hoteliers.
STR divides the Atlanta market into 11 submarkets based on hotel population. Three sub-markets, downtown, airport and Buckhead account for more than 50 percent of Atlanta’s annual room revenue and heavily influence the market’s overall performance. As might be expected, submarket hotel performance varies widely from an occupancy and average room rate perspective. June 2009 year-to-date RevPAR was down significantly in all submarkets, with Alpharetta leading the way, down almost 30 percent. The airport area has the so-called “best” RevPAR numbers among the largest three submarkets, down 15.6 percent.
How will Atlanta fare for the rest of 2009 and beyond? It’s likely the market will face challenges from increased supply growth and relatively modest improvement in demand (which, at least in the near term, means lower declines) during the next 18 months. This scenario would result in depressed occupancies and, very likely, flat to lower ADR. As with many markets, Atlanta’s hotel industry’s health is largely tied to the improvement of corporate transient and group travel—the market’s bread and butter.
The good news is Atlanta offers a fairly moderately priced, no-nonsense hotel alternative for meetings and conventions. Atlanta ranks fourth in the U.S. based on the number of Fortune 500 companies headquartered in the metro area, a huge demand generator for corporate transient and negotiated business that will drive roomnight growth steadily as the economy improves.
Look for Atlanta performance to hold fairly steady at current levels, then experience lower declines in the last quarter of 2009. Meaningful improvement is probably a year or so away. In the meantime, hoteliers will face difficult operating conditions and continue the fight to steal share in a challenging market.