Robust 2015 Hotel Performance Masks Softening

The U.S. lodging sector set a record for revenue per available room (RevPAR) of $78.671 in 2015 as a result of all-time highs in occupancy (65.6 percent) and average daily rate (ADR of $120.01). The 2015 RevPAR represents 6.3 percent growth over 2014, which, while robust, was slower than the 8.3 percent growth experienced in the prior year. The full-year 2015 results incorporate a strong Q1 beginning and a subdued Q4 ending, so that the full-year average masks weakening performance during the year. In Q4 2015 RevPAR was 4.8 percent above that of Q4 2014, down from the 8.9 in Q4 2014 from Q4 2013.

RevPAR performance for Q4 2015 is a good indicator of what we can expect in 2016, given the daily mark-to-market pricing structure of hotels. In both rising and falling market conditions, data for the trailing three-month period provides a better directional gauge than an annual result.

Occupancy rose to an all-time high in 2015 due to strong demand and limited new supply.

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As supply continues to gain momentum and growth in demand slows down, Moody’s expects that supply and demand will reach equilibrium in the next 12-18 months before tipping the scale to where supply growth exceeds demand increases.

The U.S. RevPAR growth rate slowed to 6.3 percent in 2015 from 8.3 percent in 2014. While a year-over-year growth rate of 6.3 percent is strong, it masks the underlying trends. The 2015 annual average was propped up by a very strong Q1 performance, which drifted through the middle part of the year before ending with a weaker-than-annual-average Q4 result. Exhibit 1 shows that the 2015 RevPAR performance, on a monthly year-over-year comparison basis, has decelerated.

The ability to price rooms on a daily basis can be a blessing or a curse, depending on position in the cycle. Because of this potential volatility, it is important to look at performance of current month, running three months, and running 12 months to gauge shifts in pace or direction.

For the first three months of 2015, RevPAR grew at a weighted average rate of 8.0 percent, roughly continuing the full year 2014 RevPAR growth rate of 8.3 percent. However, during the last three months of 2015, RevPAR growth downshifted to 4.8 percent over the same period in the prior year. We anticipate decelerating growth to continue in 2016. According to STR Inc.,3 January 2016 RevPAR grew 2.4 percent from January of 2015, compared to the RevPAR growth rate of 8.6 percent in January 2015 from January 2014.

In Q1, lodging demand outpaced supply by 3.2 percentage points (4.2 percent demand minus 1 percent supply). More demand for hotel rooms than new inventory of rooms helps drive higher occupancy and room rates. By Q4, the demand-supply gap had shrunk to 1.2 percentage points (2.6 percent demand minus 1.4 percent supply).

Demand growth is slowing down, while supply growth continues to accelerate, which Moody’s expects to result in supply-demand equilibrium in the near term. However, after this balance is reached, new construction will likely continue, as projects that have been approved and funded will be completed. This will lead to a supply-demand imbalance in which more rooms compete for limited demand growth, eroding occupancy and ultimately RevPAR. The slowdown in growth is also evident in the latest Red-Yellow-GreenTM Update,4 where the overall hotel sector score, while still Green (74), marked its third consecutive quarterly decline, after it peaked in Q4 2014 (80).

Long-term average annual growth rates for supply and demand are both around 2 percent. On an absolute level, the Q4 statistic of 1.4 percent increase in supply is below the long-term average (good) and the demand growth rate of 2.6 percent is higher than the long-term average (good). But the relationship between supply and demand is not as robust as it was in either Q1 2015 or as the full-year 2015 average would indicate, because the cushion between supply and demand growth rates have shrunk. Q4 2015 performance is a good indicator of what is to come in 2016.

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