Sedona Arizona - So how is the local economy doing?

By: Mark TenBroek, 2/1//2023 (updated 2/25/2024)

Introduction

We hear all the time lately that the local economy is failing, conditions are dire, and that we are heading into a recession.  So it is important to look back and see how the economy has performed over the past few years.  It is easy to say that the sky is falling, but we need to take a look at the local economic performance over the longer term and short term to see how we are actually doing.

Historical Taxable Sales Information

One of the ways that the local business community seems to evaluate how Sedona is doing is to look at the past month and compare it to the same month the year before.  Using that approach, if there is a reduction from the past year, then we must be heading toward a cliff.  And this approach assumes that we will be in a never ending cycle of increasing sales and revenues.  

One way to look at the long term performance of the Sedona economy is to look at the past.  The following graph uses past monthly sales and bed tax data to determine the gross sales that Sedona has experienced over time:

By looking at the monthly sales you can see that there is considerable variability throughout each year between the major tourist seasons in the spring and fall and the periods in between, called the “need” period by the local Chamber of Commerce.  From this data that goes back almost 20 years, one can see that while there are significant ups and downs, there has also been a general increase, especially after the 2020 pandemic occurred.  

It is often useful to look at this type of cyclical monthly data using a moving average or total.  A 12-month moving annual total simply takes the prior 12-months for a total.  This approach tends to remove the seasonal variation and shows the larger changes that are occurring while also showing the total economic value for the year.  The following graph shows this 12-month moving annual total curve for Sedona for taxable sales.  From this graph one can see that the taxable sales in Sedona are approaching $1 Billion each year.  It should also be remembered that there are also non-taxable sales such as food, healthcare, and real estate that add to the local economic activity.

From this graph one can see that after the financial crisis of 2008 when Sedona had a dramatic drop in construction of homes, there was also a decrease in the local economy, likely because Phoenix and Las Vegas saw similar significant reductions in their local economies.   Beginning in 2013 there was an increase in the local economic activity.  These increases in local economic activity continued until the pandemic struck in early 2020 when there was a significant reduction in the local economy for a time.  This was followed by an historic increase in local economic activity in the spring of 2021 that dwarfed prior increases in the local economy, likely due to reduced options for many in California and Phoenix as they all seemed to travel to our community.  

The graph above also does show a change in the trajectory of the taxable sales in Sedona. The past few months do show a slow down of the growth of 12-month totals which could be attributed to a number of factors.  First, the City Council called for a suspension of Destination Marketing by the Chamber of Commerce.  Residents called for this suspension given the unprecedented traffic and other issues with tourism in the community.  Clearly the significant growth seen post pandemic is not sustainable nor desirable within a community with limited transportation infrastructure to manage the rush of additional tourism vehicles.  The current economic activity shows rather stable performance in recent months.

Influences on Sedona Growth

Another way to look at these changes in the economy is to look at the economic activity and compare this to the annual inflation rates that are developed for the entire country.  The following graph shows our annual gross taxable sales and lodging sales, and compares them to the rate of inflation for two different time periods and what the community should expect with the national inflationary ups and downs of the overall economy.  

This above graph shows that from 2005 until 2013 the local economy under performed compared to the overall US economy using inflation as an indicator of that growth.  This was likely due in large part due to the 2008 financial crisis affecting the ability of many citizens to travel and spend their disposable income coming and staying in Sedona.  

In 2013, however, you can see a significant increase in local economic activity compared to prior years.  One could tie this to the beginning of the contract with the Sedona Chamber of Commerce and Tourist Bureau “Destination Marketing” to make Sedona a place that tourists want to visit and spend their disposable dollars.  One can see an almost exponential increase in both the total taxable sales and the spending on lodging, with the 2020 downward blip that was easily overcome in 2021.

I guess we need to determine as a community if this exponential growth is really the best for the community, or if a more controlled local economy is best for businesses and residents alike.

Local Taxable Sales Growth by Category

We can also look at our local economy in more detail by looking at the different tax sales categories to understand how each of these different categories performed.  Unfortunately, this more detailed information is only available on city financial reports going back to 2014.  The following graph shows the local gross taxable sales in a variety of categories for this period of time, again using the 12-month moving totals approach to understand the longer term trends in these annual sales.

From this graph a number of general observations can be made as follows:

• Retail - There has been overall a significant increase in retail spending in Sedona and a significant recovery after the pandemic stoppage.  This does include local sales as well as mail order sales such as from Amazon.com.  One must also remember that this category does not include most spending at local grocery as food items are generally exempt from sales tax. In spite of this, there has been a significant increase in retail sales post pandemic.
• Hotel/Motel - Over this period there has been no significant increase in the number of hotel rooms in Sedona.  In spite of that stability there has been a dramatic increase in the overall sales in this category.  While Sedona has an estimated 1,200 hotel rooms and 500 time-share units, the number of short term rental (STR) room equivalents has increased from 1,300 in 2020 to over 2,000 in early 2023.  It is believed that this additional lodging capacity, which is captured in the Hotel/Motel category, has fueled the overall dramatically increased spending in this category and some other categories in the local economy.  
• Restaurant/Bar - The increases in the prior two categories have not been followed by similar increases in this category.  If you look at the graphic, Hotel/Motel and Restaurant/Bar have very similar growth patterns until the pandemic, and then there is a dramatic increase in the Hotel/Motel category that significantly outpaces the Restaurant/Bar category.  Part of this may be hesitancy by visitors to eat in given continued issues with COVID.  It may also indicate that more visitors are using STRs and buying and cooking their own meals in their STRs helping visitors have a more economical visit since local restaurant costs can seem high to some.
• Construction - This category is remarkably flat given the amount of construction in town.  However, it should be remembered that after the building boom in the early 2000s and the bust in 2008 there are limited numbers of build sites in the community, and much of the construction activity is likely related to rehabs and moving homes into the STR market.
• Leasing - Leasing has seen a steady increase over this period.  Anecdotally, members of the business community and renters have commented that the costs of leases have increased significantly over the past few years given the pressure of STRs.  Higher leases for businesses in town may also make retail less profitable and require charging higher rates for goods.
• Communications/Utilities - These sales have been steady over this period.
• Amusements & Other - This category saw a significant drop over the Pandemic year, but have also seen a significant recovery.  Clearly the Jeep tours, trolley tours, and OHVs have seen a significant use of their amusements by visitors, but likely not by residents.

To summarize these increases, the following graphs show how these different categories have increased over the past 7 years:

These graphs show that over the past 7 years, Hotel/Motel in traditional lodging and short term rentals has increased fourfold in terms of gross sales.  This relates to an over 40% annual increase in lodging in Sedona over this 7 year timeframe, in spite of the pandemic.  Both Retail and Restaurant/Bar have also increased, but at less than half this rate.  Leasing and Amusements also show annual increases of almost 20%, which are significant.  It is believed that the majority of the Amusements category increase is due to the significant increase in OHV rentals in Sedona.  These large increases are in comparison to an annual inflation rate of about 3%.

Traditional Lodging Growth

While reviewing taxable sales in Sedona is useful, it is also important to review the changes in the use and cost of lodging in the community.  The following graphs present the information on the occupancy and Average Daily Rate (ADR) in Sedona using numbers available from the Sedona Chamber of Commerce.  These graphs also show 12-month moving averages (as opposed to totals) for these two parameters.

From the first graph, it shows that there are typically significant changes in lodging occupancy throughout the year, with a small drop over the summer, and a more significant drop during the winter months.  The 12-month moving average shows a much more consistent yearly occupancy that runs between 60% and 70%.  Notably, occupancy dropped after the 2008 financial crisis, and also significantly dropped during the pandemic year in 2020, as can be expected.  It is interesting that the occupancy rate has continued to drop slightly after the pandemic.  This drop begs the question of why since lodging had the most significant increase in growth post pandemic.  The following graph can be used to determine the reason for this.

The graph above shows that ADR has for many years shown limited variability with slightly lower ADR during the summer and winter with average rates below $150/night in 2007.  While it was noted that there has been a slight reduction in traditional lodging occupancy this graph shows that the ADR in traditional lodging has increased since the Pandemic.  There has been a substantial increase in the ADR since the Pandemic from less than $250/night to almost $350/night 2 years later.  These higher ADRs have been a contributor to the higher Hotel/Motel category increases noted earlier.  These lodging sales gains have remained steady over the past 2 years.

Economic Impact of STRs in Sedona

The number of STRs in Sedona is continually increasing.  The following graph shows the current inventory and historical numbers of STR units going back 2-1/2 years.  There is also an estimate of the equivalent number of rooms for the whole house and single room STR rentals available in Sedona. This graph shows that the largest increase is in the provision of whole house STR rentals.

So how much of the Hotel/Motel taxable sales category is generated by traditional lodging and how much by STR rentals?  The graph provided below provides some insight, but may not include the entire picture of what is happening.

The graph above uses the product of the available lodging rooms in Sedona and the occupancy and ADR provided by the Chamber of Commerce to estimate the 12-month moving total for traditional lodging gross sales, as is shown as the blue line.  The red line shows the total Hotel/Motel taxable sales as a 12-month moving total from this data provided by the State of Arizona.  The difference between these two lines can be largely attributed to the gross sales from STRs operating within Sedona.  This seems to indicate that over 60% of the lodging sales in Sedona may be due to STRs and other non-traditional lodging in the community.

2019 to 2022 Economic Comparison

It can be useful to make a comparison between the pre-Pandemic economy of 2019 to the current economy.  Clearly there was a significant drop in economic activity in 2020 followed by large increases of the economy after that period.  This analysis looks at this entire 3-year period to see the average increases (or decreases) in activity using the taxable sales in the available sales categories.  The following table shows the total taxable sales in November 2019 and the prior 12 months and compares this to the total taxable sales in November 2022 and the prior 12 months (all sales in Millions of dollars).  

So the local gross taxable sales in Sedona rose from $640M in 2019 to about $920 in 2022, an increase of almost 44%!  This analysis shows that all categories other than Communication/Utilities and Amusements/ Others exceeded the average annual inflation rate of 5% over this period. This shows significant growth in spite of the downward pressure of the Pandemic.  

The Hotel/Motel category in particular demonstrated much higher performance with a total increase of 72% over the period, or an annualized increase over this critical period of almost 20%.  As noted elsewhere in the analysis this may show significant increase in the purchase and operations of Short Term Rentals in Sedona post Pandemic.

The Construction category also exceeded the annual inflation rate over this period even though there are often lags during times of disruption as they involve large amounts of capital that are usually invested more conservatively.  

In conclusion, it appears that while the rate of inflation over this 3-year period was about 5% annually, the average rate of the expansion of the overall taxable sales in Sedona was almost 13% annually, about triple the inflationary rate.  This seems to show that in spite of the Pandemic, the local economy seems to be doing rather well!

Conclusions

The above analysis highlights the fact that Sedona has a total economy of almost $1 Billion annually based only using taxable sales.  Other components of the local economy include the sale of food and healthcare, which are not taxed or reported to the City.  Another significant economic category that does not have sales tax includes the sale of real estate and the associated fees to real estate agents.  

Since real estate is typically the largest component of state economies in the US, it is likely that the real estate market in Sedona is also larger than any of the categories shown using taxable gross sales information.  Based on the significant increases in the price of real estate in Sedona and the recent high volume of sales of property for the STR market, this economic value should be very significant.  It would be helpful to estimate these other economic numbers to understand the local economy in total.

With the available information shown above we can draw the following conclusions:

1. The local Sedona economy did not keep pace with inflation from 2004 to 2013, but has significantly outstripped the national inflation rate from 2013 to present by a significant amount.
2. The economy in Sedona is doing very well, while some would say that it remains overheated based on the analysis of 2019 compared to 2022 gross taxable sales.
3. The growth of Hotel/Motel, Retail, and Restaurant/Bar sales categories has been very significant post Pandemic. This can be attributed to additional visitors from California and Phoenix needing a place they could drive to for a vacation, but the increase in tourism has continued since travel to other areas of the US and outside the country have eased. It is hard to determine the reason for this continued strength of the local economic activity.
4. Traditional lodging operators in Sedona have been able to significantly increase their ADR with only modest impacts on occupancy and significantly increasing their gross sales as a result.  It does not appear that they are having a difficult time in this new tourism economy.
5. The action by the City Council to discontinue Destination Marketing was appropriate given the lack of local infrastructure to manage the influx of visitors and the high traffic volumes they generated.
6. The uncontrolled STR market appears to continue to rapidly increase in number and their share of the Hotel/Motel market in Sedona, likely compounding our congestion issues.
7. Even with continued improvements to the transportation infrastructure, it is likely that Sedona cannot (and probably should not try to) build its way out of the congestion issues being experienced.  
8. Additionally, the provision of more parking will likely encourage the use of more cars with their occupants to visit Sedona.  The reduction or increase in paid parking and No Parking in certain areas may be the friction necessary to control unsustainable visitation to Sedona.
9. Sedona needs to look for other ways to control/manage the visitation, and the types of transportation used by the community visitors.  The increased use of transit and alternative modes of transport such as ebikes with safe bike lanes are likely necessary to ensure that Sedona remains a livable city for the residents that remain.

Notes on Sources:

The information that this document is based on is provided by the City of Sedona using their website documents and other documents noted at the following link. Particular assistance by David Jakim in the records group at the City is appreciated.

Document Sources