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The focus on monthly and yearly data by hotel managers and investors often masks trends that are shaping the investment horizon over longer periods. For this reason we have examined the best and worst performing markets over a typical holding period of eight years. According to our analysis of Real Estate Research Corporation’s data for the period 2000-2018, the average holding period for hotels is 7.6 years. In the past couple of years it has edged up to 8.3 years, hence our use of eight years in our analysis.

The challenge facing hotel investors can be seen in the rankings of markets by RevPAR growth rates over the past 24 eight-year holding periods as shown below. Over the 24 eight-year holding periods ending between 1995 and 2018, seven markets failed to appear in the top three markets. They were Atlanta, Chicago, Norfolk, Orlando, Philadelphia, Seattle and St. Louis. Over the same period, Boston, Chicago, Miami, Minneapolis, Seattle and Tampa avoided landing in the bottom three markets. Chicago and Seattle were the only markets that didn’t make an appearance in the top or bottom three markets.

The second major finding from our analysis relates to the appearance of markets over successive periods, a phenomena known as serial correlation. For example, the San Francisco market made an appearance on nine occasions, eight of them being in successive years (2011-2018). Serial correlation is used in statistics to describe the relationship between observations of the same variable over specific periods. Serial correlation is the relationship between a variable and a lagged version of itself over various time intervals. Repeating patterns often show serial correlation when the level of a variable affects its future level.

Winners & Losers in Top 25 US Hotel Markets for 8-Year Holding Period RevPAR CAGRs 1995-2018

Source: Hotel Investment Strategies, LLC based on STR, Inc. data.

Nine of the eighteen hotel markets that appeared in the top 3 markets had serial correlations of four years or more. They were Oahu Island (8-years, 2006-2013), San Francisco (8-years, 2011-2018), Anaheim (7-years, 2001-2007), Miami (7-years, 2007-2013), Los Angeles (5-years, 2002-2006), Nashville (5-years, 2014-2018), San Diego (5-years, 2001-2005), Denver (4-years, 1995-1998) and New York (4-years, 1998-2001).

Nine of the nineteen markets that appeared in the bottom three markets had serial correlations of three years or more. They included Norfolk (6-years, 2010-2015), Dallas (6-years, 2001-2006), Detroit (5-years, 2007-2011), New Orleans (5-years, 2006-2010), Phoenix (5-years, 2011-2015), San Francisco (4-years, 2005-2008), Los Angeles (4-years, 1995-1998), Atlanta (3-years, 2002-2004) and Washington DC (3-years, 2016-2018).

Frequency of Top 25 US Markets Appearances in Top & Bottom Three Markets for 8-Year Holding Period RevPAR CAGRs 1995-2018

Source: Hotel Investment Strategies, LLC based on STR, Inc. data.

As illustrated in the table above, the San Francisco hotel market has appeared in the top 3 markets for 8-year holding period RevPAR CAGRs on nine occasions over the past 24 years. It is followed by Oahu Island (8 appearances) and Anaheim, Los Angeles and Miami each with 7 appearances).

A major and highly valuable by product of developing target markets is a list of markets to avoid! If investors are confident that certain markets will perform well, based on models and market intelligence, they should be equally confident that some markets will not do well. Because avoiding declining markets helps to enhance the performance of a hotel portfolio, it seems important for investors to develop a list of markets to avoid. Surprisingly, developing such a list doesn’t seem to be as important as developing target markets!

Our analysis reveals that the Norfolk, Phoenix and Dallas markets appeared in the bottom three markets on nine, seven and six occasions over the period of analysis.

Finally, the availability of timely market intelligence, and the seemingly predictable nature of hotel real estate markets, also give investors more confidence to target markets. Over the past ten years, good statistics on markets have become readily available, giving investors ammunition for market forecasting, and identifying target markets from the hotel investable universe.

Over the past 15 years we have assisted hotel investors with a range of forecasting needs. If you would like to explore how we might assist you in targeting potential “winners” and avoid potential “losers” please contact us.