At 7.3 percent, the state-wide rate of growth in rooms supply outpaced the 5.5 percent rate of growth in rooms demand during the first quarter of 1999. As a result, the collective occupancy of all Arizona hotels was down 1.7 percent, from 69.4 percent in the first quarter of 1998 to 69.4 percent during the first quarter of 1999. The collective average daily rate (ADR) of Arizona hotels declined by 0.5 percent, from $105.06 to $104.58.
Northern Arizona and Central Arizona (not including metropolitan Phoenix) led the state with increases in Revenue Per Available Room (RevPAR) of 22.9 percent and 5.7 percent, respectively. Almost every other region in the state saw RevPAR decline.
|Consistent with their RevPAR numbers, Northern Arizona and
Central Arizona hotels achieved occupancy increases of 8.8 percent and
7.3 percent, respectively, whereas in the other regions in the state, occupancy
declined at rates of between 1.4 percent and 7.2 percent. Northern
Arizona also achieved a significant increase in ADR (12.9 percent), where
the other regions in the state experienced either negligible increases
or declines in rate.
Mid-price hotels in the state (excluding those located in Phoenix and Tucson) experienced a 6.6 percent decline in RevPAR, from $29.85 to $27.87. The decline was driven by a 6.3 percent increase in supply that far exceeded the 1.1 percent increase in demand for the hotels in this price segment. Budget hotels, on the other hand, achieved an 8.2 percent increase in RevPAR, from $18.19 to $19.69.
Most of the increase was the result of an 8.2 percent increase in budget
hotel room rates. Upscale and economy hotels achieved RevPAR increases
of 2.0 percent and 1.2 percent, respectively.
During the first quarter of 1999, rooms demand in metropolitan Phoenix was up a very healthy 7.3 percent as compared to the same period last year. Unfortunately, the supply of rooms increased at an even faster pace of 11.2 percent. As a result, the collective occupancy in metropolitan Phoenix dropped from 78.4 percent to 75.6 percent. The collective average daily rate also decreased – from $126.65 to $124.48, a decline of 1.7 percent. The net result was a 5.2 percent decrease in RevPAR.
Two of the six geographic submarkets in Phoenix experienced slight increases in RevPAR. The Phoenix East and Phoenix Airport submarkets saw RevPAR increase by 1.0 percent and 2.0 percent, respectively. The remaining four submarkets all experienced RevPAR declines of between 5.1 percent and 11.5 percent. With the exception of the Phoenix East submarket (where demand slightly outpaced supply), the supply and demand story was the same for all of the geographic submarkets – all experienced strong rates of growth in demand and even stronger rates of growth in supply. Hardest hit were Tempe and Phoenix West, where supply increased by a whopping 18.2 percent and 14.5 percent, respectively (although Tempe, at 11.2 percent, also had the highest rate of growth in demand). Other than the Phoenix East and Phoenix Airport submarkets, all of the geographic submarkets saw declines in ADR of between 5.9 percent and 1.1 percent.
Looking at metropolitan Phoenix hotels by price segment, we find the same supply and demand story that we found with the geographic segments – in all of the price segments, meaningful rates of growth in demand were eclipsed by higher rates of growth in supply.
The largest increases in supply and demand, respectively 21.9 percent and 14.2 percent, occurred in the mid-price sector, where most of the new limited-service hotels have been added. The mid-price sector experienced an 8.3 percent decline in RevPAR, due mostly to declining occupancy, which dropped by 6.3 percent. ADR also decreased by 2.1 percent.
The economy sector, also the recipient of new limited-service hotels, experienced a 12.1 percent increase in supply and a 6.4 percent increase in demand. At 10.7 percent, this sector suffered the largest decrease in RevPAR. The decline was nearly equally divided between a 5.1 percent decrease in occupancy and a 5.9 percent decline in ADR.
As with the economy segment, the upscale segment experienced an increase in supply that was approximately double the increase in demand: 9.1 percent versus 4.2 percent. The imbalance between supply and demand in the upscale sector caused RevPAR to decline by 5.6 percent. Most of the decline had to do with a 4.6 percent decrease in occupancy. The collective ADR in this segment decreased by just 1.1 percent.
The luxury and budget segments in metropolitan Phoenix suffered the least from supply and demand imbalances. In the luxury sector, supply increased by 6.2 percent, as compared to a 4.4 percent increase in demand. RevPAR in this segment declined by just 1.1 percent. All of the decline was driven by decreasing occupancy, which dropped by 1.7 percent. The collective ADR of the luxury hotels increased by just 0.6 percent.
The budget sector had the smallest imbalance between supply and demand growth. Supply increased by 8.3 percent and demand increased by 7.3 percent. The collective RevPAR in this segment decreased by 2.6 percent, caused by a 1.0 percent drop in occupancy and a 1.6 percent drop in ADR.
In the resort sector, a modest 0.4 percent increase in demand was outpaced by a 1.1 percent increase in supply, causing occupancy to decline slightly from 80.1 percent to 79.5 percent. The collective ADR for resorts in the Phoenix metropolitan area grew by 1.7 percent to $238.72. The net result was a RevPAR increase of 0.9 percent. Where RevPAR for the luxury resorts grew by 3.0 percent, the moderately priced resorts saw RevPAR fall by 0.6 percent.
While the first quarter of 1999 was mostly about declining occupancies
and rates, the underlying fundamentals in the Phoenix market remain strong.
Most of the damage done by the flood of new limited service hotels is behind
us; they have lost favor with the capital markets and are not expected
to return to its good graces any time soon. As a result, the pace
of new development has slowed to a trickle, where it is expected to remain
for the foreseeable future. Meanwhile, rooms demand continues to
grow at a rate that has accelerated during the first quarter of each of
the past three years. It would appear that the recent supply and
demand imbalance in metropolitan Phoenix should correct itself during the
As with Phoenix, supply outpaced demand in metropolitan Tucson. In the first quarter of 1999, as compared to the first quarter of 1998, the supply of hotel rooms increased by 3.9 percent, whereas demand increased by 2.5 percent. The collective occupancy of metropolitan Tucson hotels fell by 1.4 percent, from 77.3 percent to 76.2 percent. The collective ADR increased by just 0.2 percent, from $107.11 to $107.32. The net result was a RevPAR decline of 1.2 percent.
Among the geographic submarkets there were winners and losers. Central Tucson achieved a RevPAR increase of 5.7 percent, largely as a result of a 7.1 percent increase in ADR. The Tucson East market managed a RevPAR increase of 2.2 percent, which was primarily due to a 2.7 percent increase in occupancy. In the Tucson South/Airport and Tucson North/West markets, it was a different story. The South/Airport market experienced a 4.0 percent decline in RevPAR, which was roughly attributable to a 2.3 percent decline in occupancy and a 1.7 percent decline in ADR. In the Tucson North/West submarket RevPAR decreased by 3.6 percent, largely as a result of a 4.8 percent decline in occupancy.
RevPAR decreased in four of the five price segments in Tucson. Unlike Phoenix, however, the mid-price segment demonstrated surprising strength, attaining a RevPAR increase of 3.6 percent. This segment saw a 0.4 percent increase in demand and no increase in supply. In the economy sector, a 2.5 percent increase in demand was substantially outpaced by a supply growth of 11.0 percent. The result was a 5.8 percent decrease in RevPAR, which was principally attributable to a 7.7 percent decline in occupancy.
In the luxury and upscale sectors, supply and demand increases were relatively well balanced and RevPAR remained largely unchanged (both sectors saw RevPAR declines of less than one percent). In the budget sector, supply and demand increases were approximately equal and occupancy changed little. The ADR in the budget sector, however, fell by 3.7 percent, most likely due to the substantial amount of new competition in the economy segment.
The luxury and upscale resort hotels in Tucson saw no increase in supply
and a decline in demand of 1.0 percent. Occupancy, ADR and RevPAR at these
hotels has remained relatively constant.
Warnick & Company is a consulting, investment banking and asset management firm
that specializes in the hospitality and recreational real estate industries.
Richard Warnick, ISHC, CRE, is President of Warnick & Company, a Phoenix-based strategic advisory and investment banking firm specializing in hospitality and recreational real estate. The company serves as an advisor to many of the world’s leading hotel and real estate companies, as well as hotel owners, international financial institutions and government agencies. Warnick & Company is also one of the top hotel brokerage firms in the United States.
|Also See:||Arizona Lodging Insights / Year End 1998 / Warnick & Co. / April 1999|
|Pueblo of Santa Ana and Hyatt to Create New Mexico's First Major Golf and Spa Resort / Feb 1999|
|Arizona Lodging Insights / 1st Qtr 1998 / Warnick & Co. / July 1998|