During the period 1995-1998, growth in the supply of hotel rooms outpaced growth in demand causing statewide occupancy to decline.  The number of occupied room nights in Arizona increased at a compound average annual rate of 2.2 percent during this time period, while the number of available room nights increased at a rate of 5.7 percent per year. With supply outpacing demand, the collective occupancy of Arizona hotels declined by 6.6 points, from 68.5 percent in 1995 to 61.9 percent in 1998. 

Despite the decline in occupancy, room rates increased at a rate higher than the level of inflation. During the period 1995 - 1998, the collective average daily rate of Arizona hotels increased from $75.03 to $84.93, a compound average annual growth rate of 4.2 percent. This compares to an average inflation rate of approximately 2.5 percent, indicating that there was "real growth" of approximately 1.7 percent during this period of time. 

Revenue Per Available Room (RevPAR) increased from $51.36 in 1995 to $52.55 in 1998, a compound average annual rate of growth of 0.8 percent. 

During 1998, the number of available rooms in Arizona increased by 7.1 percent. Occupancy declined from 64.8 percent in 1997 to 61.9 percent in 1998, a reduction of 2.9 points. With the large increase in room supply  the collective average daily rate increased by only 1.2 percent in 1998, as compared with an inflation rate of 1.6 percent. 

Declining occupancy and minimal growth in ADR resulted in a 3.4 percent drop in RevPAR during 1998. This was the first year since 1992 that RevPAR actually declined.  Virtually every submarket experienced a decrease in RevPAR, with the northern Arizona and the western Arizona submarkets experiencing the largest declines (5.7 percent and 6.2 percent, respectively). 

Metropolitan Phoenix (chart) 

Metropolitan  Phoenix continued  to  exhibit  its popularity as a travel destination, as lodging demand increased 4.2 percent over that of 1997. However, during that same period, 4,600 new rooms entered the market, an increase of 11.2 percent.  Despite the differences in price, services and amenities between limited-service hotels and full-service/resort properties, the sheer number of new limited-service rooms siphoned demand from all product sectors. While the budget, economy and mid-priced sectors experienced the largest declines in performance, the upscale and luxury sectors were also affected. 

Occupancy in the metro area was 64.7 percent in 1998, a decline of 6.4 percent from 1997.  Not surprisingly, the submarkets that had the largest increases in supply experienced the greatest impact. With a 16.8 percent increase in new rooms, Tempe experienced a 12.7 percent decline in occupancy. In Mesa/Chandler, where supply increased by 18.2 percent, occupancy declined by 10 percent. 

Average daily room rates increased only 0.5 percent, well below the general rate of inflation. The nominal growth in room rates, combined with the decline in occupancy, caused RevPAR to fall by 5.9 percent, to $64.14. This is the first decline in RevPAR since 1991, when declines in both occupancy and room rates caused RevPAR to fall by 3.5 percent. 

Phoenix resorts experienced a 3.7 percent decline in demand during 1998. The effects of new supply were exacerbated in the first quarter by cold and wet weather that was brought on by "El Nino," which caused groups and tourists to shorten or cancel their visits. 

Winners and Losers 

There is an old adage that a man can drown in a lake with an average depth of one inch. While the market "averages" are often used to analyze performance trends, they ignore the fact that there are winners and losers in the battle for market share, and the actual performance of individual properties is very different from the market as a whole. 

To provide some insight into the winners and losers among metro Phoenix hotels, we divided the market into segments using a variety of different criteria. These segments are described below. Our analysis follows. 

• Age Analysis: Comparison of mid-priced hotels opened prior to 1980, during the 1980's and during the 1990's.
• Segmentation Analysis: Rather than follow the normal STR convention of defining segments by achieved ADR (as depicted on pages 8-10), we categorized each hotel in the market based primarily on brand, with some adjustments primarily for property condition and facilities.
• "Same Store" Analysis: A comparison of hotels that have been open since 1997 ("same store") compared to all Phoenix hotels.

We divided the market into hotels built prior to 1980, during the 1980's, and during the 1990's.  We calculated the occupancy and average daily rate for each group for each of the years 1992 through 1998, along with their respective market and rate shares. Because the competitiveness of resorts and certain upscale hotels is less affected by age (e.g., the Arizona Biltmore, built in 1926, is still a very competitive resort hotel), we elected to focus our age analysis on the mid-priced segment.  This segment is also where much of the new supply has been added and thus provides a good "laboratory" for assessing the impact of new supply.  To avoid skewing the results by including hotels that have yet to reach stabilized occupancies, we did not include hotels built after 1997. An analysis of the data revealed the following trends: 

• In the early part of the decade, hotels built prior to 1980 had the lowest occupancies and market share and the hotels built during the 1990's had the highest occupancies and market share.  However, beginning in 1995, the market share of the 1990's-built hotels began to slip relative to the other age groups, and in 1996 through 1998, their occupancy actually fell below the occupancy of hotels built in the 1980's.

• Average daily rates tracked with the age of the property throughout all segments and all years, with the oldest hotels having the lowest rates and the newest hotels having the highest rates.   However, the largest percentage growth  in  room rates occurred  in the properties built either prior to or during the 1980's.  The hotels built during the 1990's experienced initial strong gains in rate share (measured as a ratio to all mid-priced hotels) in 1992 and 1993, then saw their rate share decline in the years 1994 through 1998.

The performance may also have been affected by a lack of consumer recognition/support for emerging brands which comprised a portion of the new supply. 

Segmentation Analysis (chart) 

As stated in the introduction, segmentation utilized in this analysis is not based on STR's price segmentation. Rather, we categorized each hotel in the market by brand with adjustments for property condition and facilities. Non chain-affiliated hotels were categorized by quality level.  Some key observations are as follows: 

• While occupancy peaked in 1995 for the market as a whole, the peak varied by segment: 1995 for budget/economy; 1994 for mid-price; 1995 for upscale; 1993 for luxury.

• The upscale segment was the best occupancy performer in four of the seven years and was tied with luxury in one. Budget/economy was consistently the worst occupancy performer.

• The greatest decline in occupancy occurred in the mid-price segment. This is not surprising given the amount of new supply in this segment.

• The luxury segment experienced the greatest growth in ADR during the seven-year period (59 percent).  ADR in the budget/economy segment increased the least.

Because of the number of new hotels entering the market, we believed that the performance of the market as a whole was being distorted. The data below confirms this hypothesis: hotels opened in 1997 and 1998 performed worse than those opened prior to 1997, and were sufficient in number to materially affect the entire market. 

The majority of this performance disparity can probably be attributed to the maturation (ramp-up) of the new properties, although location and brand issues enter into the equation. In addition, many properties opened after the first quarter "high season," which negatively affected their year-end results. Whatever the reason, the market performance of established hotels is not quite as bad as aggregate data would indicate. 
 

Metropolitan Phoenix Hotel Acquisitions: 
Transaction Activity Continues Upward Momentum in 1998 

Investor interest in hotels in the metropolitan Phoenix area reached a 5-year high in 1998.  During 1998, there were 25 hotel acquisitions, which eclipsed the record of 23 sales that occurred in the market during 1997. During 1996 and 1997, there was a  noticeable upswing in both the total transaction value and the average transaction price per room. Activity in 1998 continued this trend with the total transaction value soaring to almost $300 million and the average transaction price per room increasing to nearly $90,000. Only in 1994 were there higher transaction values, a year generally considered to be an anomaly given that it included the sale of the Phoenician, the Crescent, and the Ritz-Carlton Hotels. Combined, these acquisitions were approximately 85 percent of the total transaction value during 1994. 

As was the case in 1997, there was a significantly higher ratio of limited-service hotel transactions during 1998 as compared to prior years. While limited in number, the resort and full-service hotel transactions resulted in rather impressive price per room values, including: the Ritz-Carlton, $266,904 per room; Royal Palms, $263,945 per room; and, the Embassy Suites Tempe, $179,893 per room. 
 

Metropolitan Tucson (chart) 

Unlike other areas of Arizona, which have experienced steady demand growth, metropolitan Tucson has experienced fluctuations in demand over the past several years, ranging from a 2.7 percent decline in 1996 to a 4.1 percent increase in 1997.  Demand growth for the entire market was 1.7 percent during 1998. 

In 1998, the number of rooms in the market increased 4.1 percent, below the rate of growth experienced in Phoenix and the state of Arizona as a whole. However1 the nominal growth in demand was insufficient to offset the growth in supply and, for the third straight year, marketwide occupancy fell (from 65.0 percent in 1997 to 63.5 percent in 1998). All of the submarkets, except for downtown and Tucson east, and all price segments except economy, experienced declining occupancy. 

Average daily room rates in metropolitan Tucson increased 1.7 percent to $85.50, with the greatest rate of growth, 4.5 percent, occurring in the downtown submarket. Growth in room rates was insufficient to counter the decline in occupancy, and marketwide RevPAR declined 0.7 percent. 

Tucson resorts experienced a 3.2 percent decline in captured demand in 1998. We attribute the majority of the decline to the El Nino phenomenon. Virtually the entire decline was experienced in the first quarter.