Finance & DevelopmentFinanceStrong Showing in 2015 for Upper-Upscale Segment

Strong Showing in 2015 for Upper-Upscale Segment

Often offering large meeting spaces and located in desirable downtown locations, full-service, upper-upscale hotel properties had a landmark 2015. Last year, this segment of the industry showed high occupancy, had a spike in average daily rate (ADR), and drove revenue per available room (RevPAR) up more than 5 percent. Here is a closer look at the numbers and the factors that drove the upper-upscale marketplace to such highs. Through the first 10 months of 2015, upper-upscale hotels showed very healthy performance and steady demand growth. Occupancy grew by more than 0.9 percent to a record high of 76.1 percent. January was the only month during which occupancy dipped below 70 percent, but this was made up for in June and July when it was recorded at over 80 percent.

With this high level of occupancy came a healthy optimism among revenue managers, as well as pricing power. ADR increased by 4.3 percent through October to $176. In turn, this drove RevPAR up 5.2 percent. Additionally, October 2015 was the 68th month in a row that RevPAR grew. STR does not expect this trend to ease, and predicts that RevPAR growth will be disproportionately driven by ADR growth for the foreseeable future.

Room demand for upper-upscale hotels has increased every year since 2010 and even though the room demand growth has slowed from the 2014 rate (3.7 percent to 2.1 percent), STR expects the number of rooms sold to reach record highs year after year for the foreseeable future. In fact, from January to October 2015, hotels reported 133 million room nights sold, which is more rooms than were sold in 2007 as a whole.

Because of the upper-upscale segment’s healthy demand and high ADR, developer interest in this area of the industry has increased and the number of projects in the pipeline has grown. Through October 2015, supply grew 1.2 percent to roughly 1,600 hotels. STR expects this number to increase even further over time. That said, since development costs for full-service hotels with meeting space are much higher than limited-service hotels, the expected sharp increase in the U.S. rooms inventory over the next few years will not be driven by upper-upscale hotels but rather their limited-service brethren.

Segmentation data for these full-service hotels shows that ADR increases are almost evenly distributed between group ADR growth (4 percent) and transient ADR growth (4.4 percent). Keep in mind that this is likely because the group room rates were negotiated well in advance of the date that the rooms were used. Hopefully this implies that hotel sales directors are using the continued price increases for transient rooms as a guide to continue to push group ADRs as they negotiate room contingents for the next few years.

Over the next few years, STR expects the upper-upscale segment to continue healthy ADR and RevPAR growth. Though, since most of these hotels are already operating near or at capacity, occupancy growth will—not surprisingly—be muted.

About the Author
Jan Freitag is senior vice president of STR.