September results demonstrate that the strong room demand rebound for U.S. hotels (when compared against the year 2009) is being followed by a slow but steady increase in average daily rate (ADR). Since May 2010 ADR has experienced growth—it’s been small, but it’s growth nonetheless.
In September 2010 rate growth was 2 percent better than September 2009. Of course, in September 2009, ADR was 10 percent lower than a year prior, so the comparables were easy. So far this year, total room revenue for the hotel industry is $4.9 billion more than during the first nine months of 2009—and $5.2 billion higher when only considering months with positive revenue growth. So, the short interpretation of these figures is easy: travelers are back on the road, room demand is back and hoteliers are able to slowly build ADR back up.
However, this blanket statement is not quite true when examining the chain scales. To examine how the room rate recovery is playing out at different price points, we grouped the chain scale universe into three categories. We grouped the high-end chain scales (luxury, upper upscale, and upscale) as “high end,” we grouped midscale with food and beverage and midscale without food and beverage as “midscale,” and we left the economy segment on its own. The following discussion shows the impact of rate increase on these three categories.
As the chart shows, national ADR increases were led by the high end of the chain-affiliated hotels. Despite the fact that these chains started the year with the deepest discounts of all (-11.2 percent), their recovery trajectory was also the steepest. Only five months later, ADR already increased by 1 percent. This is a remarkable trend and speed of change, mostly fueled by the luxury chain scales and their remarkable resilience. In absolute terms this means that a high end room which cost $159 in September 2008 and $135 in September of 2009, costs $139 in September 2010. Given the price increases this year, it is nice to note that so far demand is 24 million rooms higher than it was for the first nine months of last year. It will be interesting to observe if the $20 decline in room rate over the last two years will be haunting the segment for a while or if hoteliers can increase rates at a quick pace as the year progresses. So far this seems elusive.
For the midscale chains, ADR growth has been slightly positive in the last three months. Since July, room rates have increased each month but the percent changes were less than 1 percent. Even in May and June when rates were still declining, house discounts were also less than 1 percent. So, the most recent room rate changes for this segment—either way—can be characterized as minimal. This is despite the fact that so far this year more than 13 million more rooms were sold than last year. The total ADR swing between September 2008 ($90.98) and September 2010 ($85.59) was $5, so the rate increases could be more pronounced as travelers return.
In the economy segment, room rate growth has so far been invisible. Although the continued discounting is slowing each month, we still reported lower rates than for the same month last year. For the last three months discounts were less than two percent and eventually positive rate growth will appear, but probably not this year. This is despite the increase in room demand by over 5 million rooms this year. In September of 2008 the economy ADR was recorded at $55; this September it was about $5 less, or around $50. So, it remains questionable when a $5 rate increase can materialize.
Looking at the U.S. lodging industry as a whole we can say with some certainty that ADRs have stopped their downward slide and that rate growth will be sustainable in 2011. However, ADR change is not yet positive across the board and the increases are lead by the high end of the market. The steep discounts of the last two years are not easily reversed and it will take discipline and education of the customer to monetize on the continued strong demand growth.
Jan D. Freitag is vice president of global development at STR.
