U.S. hotels - January 2023 commentary

January 2023 Top-Line Metrics (percentage change from January 2019):
 

• Occupancy: 52.8% (-3.0%)
• Average daily rate (ADR): US$142.14 (+13.8%)
• Revenue per available room (RevPAR): US$75.01 (+10.4%)

Key points
 

• Indexes are becoming challenging to translate and are less telling. Expect a shift to year-over-year percent change by March/April.
• Group demand was slightly softer than normal in January because of weather, calendar shifts, holiday movements, and a slower New Year’s Eve.
• The Top 25 Markets reported group demand recovery on par with all other markets, pointing to meeting planner preference for major urban centers.
• The number of rooms in construction grew YoY, albeit modestly, while the total active pipeline continues to contract.

Occupancy for the month reached 52.8%, which was well above the long-term average of 50% but still below the 54% average from 2015-2020. The 2-point difference in occupancy was largely a function of supply growth over the past four years as demand was slightly higher than pre-pandemic level.

There are some mitigating factors to this chart, however.

First are the holiday day-of-week shifts:

Christmas Day 2022 fell on a Sunday, which combined the poorest-performing holiday with the weakest day of week. Back in 2019, the situation was more advantageous for the industry with Christmas on a Wednesday.

New Year’s Eve 2022 fell on a Saturday, which aligned a major leisure demand event with the biggest leisure travel day. Again, for comparison, New Year’s Eve in 2019 was on a Tuesday.

This meant there was an extra week for business travelers and groups in December 2022 because the leisure holidays fell on weekends. This explains the “good” December weekday occupancy and the “bad” December weekend occupancy.

It also makes December a moderately difficult comparison month, as a perfect calendar helped optimize demand.

Second is the week shift vs. 2019:

As of 2023, we are almost a full week off 2019, meaning the comparison is the second week of January 2019 (normal week) to the first week of January 2023 (which is still slow on group/business travel due to the holidays). Now apply this offset to an entire month and that is part of why January 2023 appears so "bad" on the weekday occupancy index.

The calendar will be one of the biggest considerations in understanding hotel performance data this year. As we move further out from 2019, the big swings in index around holidays are going to become more common and pronounced.

There are some ways around the index, however. From March/April, year-over-year comparisons will again be in play. Additionally, month-over-month trends can provide some clarity.

Other than in January 2022, when occupancy decreased nearly 6 points from December because of the Omicron surge, January occupancy increases relative to the prior December. That increase has decelerated over time, from 2-3 points pre-Great Financial Crisis to 0.5-2 points post-recession. In 2023, occupancy declined 0.7 points from the prior month.

This shift in 2023 makes you question if January was somewhat weak or just the result of the perfect storm of calendar shifts.

Shifting the focus to the index for average daily rate (ADR), we have officially reached the peak. This is slightly notable in that while rates look to have reached peak growth level across all days of the week, weekday/weekend indexes remain extremely disparate.

Prior to the pandemic, ADR generally increased (or decreased) evenly across days of the week, with some variance for factors like events and holiday shifts. Actual ADR was typically stronger on weekdays, while weekends reported higher rates only during major leisure months.

January 2023 was the first month that comes anywhere close to repeating that trend. Although weekend ADR was still $6 ahead of weekdays, January typically had the biggest weekday-weekend delta pre-pandemic.

It is unlikely that the rate profile will reset in the short-term, as 2023 ADR growth will be limited with modest to no growth year over year post-March. Unless the industry starts dropping rates, which results in year-over-year declines in weekend rates, it is unlikely that weekday ADR will overtake weekends this year.

Segmentation

Segmentation indexes reveal more on the January calendar comp. The group demand index reflected the weakest level since March 2022. At the same time, the transient demand index improved month over month.

The softening group index aligned with the holiday and calendar shifts mentioned above—transient demand is more difficult to interpret. Looking again at the month-over-month occupancy differences reveals the cause of the January index discrepancies.

Transient occupancy declined from December, while group occupancy rose, which is the normal pattern. However, group occupancy did not increase as much as it should based on historical January performance.

To some extent, the calendar can come into play, but 2012 is an exact match to 2023 in day-to-day and date-to-date matchups. January 1, 2012, and January 1, 2023, each fell on a Sunday, which is a good comparison for this year.

Going a step further and looking into some week-over-week analysis, the opening month of 2023 was not your typical January. Group demand over New Year’s Eve weekend did not increase as much as it “should” have. While week-over-week group demand has increased exactly as it should, the base that 2023 started against – the week ending 31 December – was lower than the benchmark.

Markets

Group performance softened in January across both the Top 25 Markets and all other markets, but beyond that, another interesting trend emerged. Secondary and tertiary markets reported the return of groups first, which tracks well with how other segments of demand rebounded. The smaller markets brought back demand first, often leisure, and that translated into groups as well (recall the strong weekend group demand in late 2021 and all the COVID weddings). 

After a slower start, group demand in the Top 25 Markets has caught up with all other markets, highlighting the continued popularity of major markets post-COVID.

Five of the Top 25 Markets pushed group demand ahead of 2019 levels in January.

Tampa and Dallas were the only markets to report group and full occupancy recovery in January.

Pipeline

The number of rooms in construction ticked up again this month as rooms in early stages of development slowly filter through the pipeline. While in-construction room growth continues to recover, it is not back to pre-pandemic levels.

Luxury rooms in construction, while still the overall smallest class of hotels, show strong growth rates.

Upper Upscale development activity has also started to pick up, pointing toward developer optimism in business/group travel.

Monthly P&L

January 2023 bottom-line performance (% change against January 2019):

• GOPPAR: US$50.05 (-9.3%)
• TRevPAR: US$178.55 (-1.7%)
• EBITDA PAR: US$28.48 (-15.0%)
• LPAR (Labor Costs): US$70.01 (+0.1%)

Labor costs have risen over comparable 2019 levels for five consecutive months, with labor margins for total U.S., full-and limited-service hotels also showing a lift over pre-pandemic levels. Profit margins, on the other hand, remain lower than January 2019 but are still in range with previous levels.

Among the Top 25 Markets, Las Vegas showed the largest TRevPAR and GOPPAR improvements for the month. Convention and group-dependent markets such as New York City, Boston, and Minneapolis saw a slower month in these metrics. Markets at the top and bottom have stayed consistent, with beach and warmer weather destinations at the top of the leaderboard and more urban/business-centric markets at the bottom. 

Latest Weekly Insights

Hotel occupancy continued a seasonal rise, reaching 64.2% for the week ending 25 February. That level was up 2.2 percentage points (ppts) year over year (YoY). Room demand (24.9 million) was the highest ever for the week containing the Presidents’ Day holiday and the highest level of the year thus far, powered by week-on-week demand growth for each of the weekdays (Sunday-Thursday). Tuesday through Thursday occupancy was particularly strong at 64.6%, which was also the highest for those three days thus far in 2023. Read more here.