U.S. hotel commentary - May 2023

May 2023 Top-Line Metrics (percentage change from May 2022):

• Occupancy: 64.8% (-0.2%)
• Average daily rate (ADR): US$156.25 (+3.8%)
• Revenue per available room (RevPAR): US$101.31 (+3.7%)
   

May 2023 Bottom-Line Metrics (percentage change from May 2022): 

• GOPPAR: US$83.86 (-2.6%)
• TRevPAR: US$222.78 (+4.1%) 
• EBITDA PAR: US$61.16 (-7.1%)
• LPAR: US$72.82 (+13.6%)

Key points

• An anemic 0.1% demand growth rate was not enough to grow occupancy year over year.
• Weekends were the culprit behind May’s lower demand growth, as weekend levels declined year over year for the second month in a row. Continued weekend demand declines are a sign of the end of the “revenge travel” era and the normalization of industry travel trends.
• ADR, while still strong, has cooled alongside inflation and rose “only” 3.7%. Take that modest growth rate as a sign of continued normalization as well as the end to the price-agnostic traveler.
• The most business-reliant chains – Upper Upscale, Upscale, and Upper Midscale – were the only three to increase occupancy year over year in May. Luxury chain demand rose 3.2%–the highest among all chain scales–but supply growth stymied occupancy growth.
• Weekend group demand fell year over year for the second month in a row, in yet another example of travel resetting to pre-pandemic patterns. Transient rates reflected a similar trend, with transient ADR falling as a result of weekend declines.
• U.S. hotel revenues and profits on a PAR basis remain at the strongest levels since before the pandemic.
• Profit margins are still strong but higher operating expenses are starting to impact margins.
• Labor costs are growing at a faster rate compared to revenues and profits.

U.S. RevPAR increased 3.7% year over year (YoY) to $101.31. Growth was driven entirely by ADR, which rose 3.8% even as occupancy declined 0.2% from May 2022.

The 0.1% demand growth rate added 80,000 room nights sold from May 2022. The calendar was not a negative in the YoY comparison, as we traded a Sunday in 2022 for a Monday in 2023, which should have had a positive impact, if any.

While calendar shifts will continue to be a factor to watch, it’s more likely at this stage that the overall macro environment – e.g., higher interest rates, a high cost of living, and uncertainty about the future – is contributing to the slower demand growth.

Additionally, with international borders now fully open, Americans’ pent-up demand for international travel is resulting in a softening in domestic travel. On the flip side, international travel to the U.S. has yet to fully recover. Comparing May 2023 to May 2019, more Americans traveled internationally (+8%) while fewer international visitors entered the U.S. (-19.6%) according to the APIS/I-92 Monitor (trade.gov).

Like April, most of the slower demand in May came from weekends, when occupancy declined YoY for the third consecutive month. Weekday growth, while decelerating, continues to prop up industry occupancy as business travel continues to rebuild.

Softened weekends aren’t necessarily a bad sign, but more a reset to ‘normal’ travel patterns after the revenge travel-driven summers of 2021 and 2022. Corporate weekday travel, which was much slower to recover and reached lower peaks last year, has a stronger YoY growth level to compensate.

On the ADR front, growth is finally normalizing, a result of both the slowed demand growth and moderating inflation.

As with occupancy, weekdays lead in ADR growth, an offset to slower growth on those days in 2022. Additionally, weekend pricing power does still exist despite the YoY declines in occupancy.

Segmentation

Both transient and group demand increased year over year, with group (+3.2%) increasing marginally more than transient (+3.0%). While year-over-year growth has come in line between the two segments, groups do continue to trail transient demand on an index.

The relatively “slower” group demand growth comes from the rebalancing between weekday and weekend groups. Recall that during the pandemic, weekend groups returned first and fastest, with leisure-driven weekend outings – sports events, weddings, and family reunion type events – driving group demand as corporate continued to languish.

As the pent-up leisure group demand has waned, weekend group demand has softened YoY.

While transient demand has continued to increase across all day-of-week buckets, transient rates have not been so fortunate. Transient ADR declined YoY for the second consecutive month in May.

The decline comes largely out of weekend and shoulder ADR declines, as weekday rates continue to grow amid the return of the corporate traveler.

Markets

The Top 25 Markets helped U.S. demand growth in May, with a 1.2% increase YoY. The other 142 markets declined 0.6% in aggregate, with only 62 markets outside of the Top 25 reporting YoY demand growth.

Weekends are again the cause here, as last year’s revenge travel gives way to this year’s more sedate summer demand.

The Top 25 appears similar, with occupancy declining year-over-year among the markets that performed best last year and/or have a strong leisure demand component.

Broken down by day of week, it’s again the weekends that are weakest, although at +1.7%, weekday occupancy growth was also fairly modest.

Despite the difficulties in hotel financing options right now, the industry appears comfortable holding I/C rooms between 150k-160k—as has been the case for the last 18 months.

The hottest markets are similar in both the short- and longer-term, as markets with more rooms in construction today also typically have more rooms in earlier phases of development as well.

Monthly P&L

U.S. hotel total revenue per available room (TRevPAR) grew only 4.1% in May to $222.78. Year-over-year growth in the metric has decreased every month for the last few months. Labor costs (LPAR) growth slowed slightly in May, however it is still strong at 13.6% YoY growth. Weak revenue growth, paired with strong expense growth, led to a slight GOPPAR decline of 2.6% (after 16 months of YoY growth). EBITDA declined even more, at 7.1%.

Profit margins are still strong, despite a YoY decline to 37.6% (GOP margin) and 27.5% (EBITDA margin). Labor cost margins were up (to 32.7%). 

The Top 25 Markets are showing continuous improvement, with average GOPPAR increasing $2 from last year. GOP margins are only 1 percentage point behind May 2022. All other markets, however, are continuing to benefit from the lower labor costs than those seen in the Top 25, and these markets are still showing higher profit margins. 

Latest weekly data

One week into summer (officially), U.S. occupancy rose to 71.4%, up 0.6 percentage points (ppts) from the previous week but down 0.7ppts from last year. ADR grew 0.9% year over year (YoY) to US$159, while RevPAR stayed essentially flat YoY (-0.1) at US$114, due to the slight drop in occupancy. Read more here.