The Second Part of the Recovery

As the hotel industry continues to report stronger demand numbers, a recovery becomes more evident. That can be seen when examining the relationship between hotels in urban and suburban locations and how they play into the overall industry’s recovery.

STR assigns each U.S. hotel one of six location types based on its physical location: urban, suburban, airport, resort, interstate, and small town/metro. Major metro markets most likely have hotels that fit in almost all location types. During a downturn, with demand declines and room discounts rampant, occupancies drop across the board. In a recovery, with macro-economic growth slowly showing momentum and room rates still depressed, travelers are finding bargains in urban areas. Although severely hurting profitability, these discounts seem to attract travelers and the demand percent change for urban hotels turns positive earlier than for hotels in other location types during the first part of a lodging recovery cycle.

Eventually, though, the annualized demand for hotels in suburban markets increases as well. Then, as a full recovery takes shape, demand growth for hotels in suburban locations actually outperforms demand growth for hotels in urban locations. In the U.S., that occurred in September of 2010.

The annualized occupancy for urban hotels reached over 65 percent during that month. In other words, hotels in urban locations sold almost two out of three available rooms for a consistent period. When taking into consideration that Sunday night occupancies are historically in the low 50 percent range, this implies that Tuesday, Wednesday, and Saturday nights—the historic high demand days for urban hotels—are registering occupancies in the 80 percent and even 90 percent range.

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During that high demand environment, urban hotel operators faced compression and sell-out nights and then, logically, increased their room rates. That was welcome news because rates for urban hotels were quite depressed and highly discounted since early 2009. At the cycle’s trough in early 2010 the discounts reached over 12 percent. Suburban hotel operators also started discounting around the same time, but their annualized discounts “only” reached 8.8 percent in the spring of 2010.

Discounting at urban hotels finally stopped in October 2010. In other words, as annualized occupancy showed marked improvements, and sold out nights became more common, hoteliers in urban hotels took their STAR report data to heart and the environment changed to a seller’s market from a buyer’s market. However, their colleagues in suburban hotels at that time still felt the need to discount, despite the already positive demand changes.

Put all of this data together and you get a very interesting picture. In September and October of 2010, as urban hotels faced compression their room rate growth finally turned positive. At that exact point in time, the demand growth seems to have shifted and suburban hotels registered a higher demand growth rate than those hotels in urban locations.

The lesson from these data points is that the recovery does not affect all areas equally and that the urban locations recover their occupancy earlier. As this happens travelers are choosing outlying, suburban areas and increase occupancies for suburban hotels during the later, second part of the lodging recovery cycle.

Jan D. Freitag is vice president of global development at Smith Travel Research. 

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