Destinations Relaxation

Conventional wisdom says that high-end resort hotels are more vulnerable to economic recessions because of the discretionary nature of leisure expenditures. This wisdom rang true when we reviewed how upper-tier resorts performed during the recent recession and found how much more they suffered in 2008 and 2009 compared to the average U.S. hotel. Since then, however, we have observed a strong bounce back in resort occupancy levels, which should allow for significant increases in average daily room rates (ADR) going forward.

To better understand the market performance of U.S. resorts, PKF Hospitality Research analyzed some Class C resort data provided by Smith Travel Research (STR). STR defines Class C resorts as a destination resort with a full scale of facilities to attract and retain vacationers. In 2012, this sample of 307 resorts averaged 501 rooms and achieved an average occupancy of 65.3 percent and an ADR of $175.74. We ran this data through our own econometric forecasting models to project the future performance of this type of resort for 2013 through 2017.

According to data from STR, the long run average (LRA) occupancy level among Class C resorts from 1998 through 2012 is 66.6 percent. The LRA change in ADR during the same period is an annual increase of 3.5 percent, yielding an LRA revenue per available room (RevPAR) increase of 3.5 percent annually. Peak occupancy among Class C resorts during the past 10 years was achieved in 2007 at a level of 67.1 percent.


Accommodated demand, as measured by the number of occupied rooms, decreased 5 percent in 2008 and 8.9 percent in 2009 as the recession crippled travel, particularly in the leisure and group meeting segments. Similar to other hotels across the United States, the demand for Class C resorts began to recover in 2010 and has grown at a compound annual rate of 3.6 percent through 2012. Year-end 2012 occupancy was 65.3 percent.

Peak ADR in the last 10 years among the sample of Class C resorts was $183.40 in 2008. Again, most hotels across the country saw decreases in ADR in 2009 and into 2010, and the resort segment was no exception. ADR declined 10.5 percent in 2009 and 2.5 percent in 2010 before seeing increases of 4.4 percent and 4.5 percent in 2011 and 2012, respectively.

These changes in occupancy and ADR resulted in significant swings in RevPAR, with the largest decrease occurring in 2009 at a rate of negative 18.4 percent. Since then, however, RevPAR has increased at or above the LRA annual rate of change. RevPAR for the sample of Class C resorts was $114.76 in 2012, still roughly $9 below the previous peak RevPAR of $123.55 in 2007.

Luxury and Income

Our analysis has found that upper-tier properties benefit most from growth in income, while the lower-tier hotels are dependent on growth in employment.
Since the depths of the recession in 2009, personal income has recovered to pre-recession levels. Unfortunately, employment recovery is forecast to lag until 2015. With personal income leading the slow economic comeback, luxury and upper-upscale hotels have recovered at a quicker pace than properties in the more moderately priced chain scales.

Given the Class C resort average ADR of $175.74 in 2012, the vast majority of properties in the sample are positioned in the upper-upscale and luxury chain-scale segments. Therefore, a significant driver of the recent strong performance of these high-end resorts has been the rising income of the relatively wealthy individuals that patronize these properties.

Moody’s Analytics forecasts persistent growth in personal income over the next five years. Therefore, we project the occupancy for Class C resorts will continue to grow and exceed the LRA of 66.6 percent each year from 2013 through 2017.

Having surpassed the LRA occupancy level, the U.S. resort market is reaching the point where market conditions should allow managers to raise room rates significantly. PKF forecasts room rates increasing at a compound annual growth rate (CAGR) of 5.7 percent from 2013 through 2017. Driven predominantly by gains in ADR, Class C resort RevPAR is projected to increase at a CAGR of 6.8 percent over the next five years.

Financial Performance

While resort hotel revenues are forecast to return to their pre-recession levels in 2014, recovery on the bottom line will take longer. We analyzed the operating performance of comparable destination resort hotels for 2007 through 2012.

Similar to that of the average U.S. hotel, the net operating income (NOI) at resorts declined significantly in 2008 and 2009. Unlike other property types, however, NOI at resorts continued to decline through 2010. From 2007 to 2010, profits at resorts declined 41.5 percent. By year-end 2012 we estimate that resort hotels had recouped only 39 percent of the lost profits, thus indicating that full recovery on the bottom line will not occur until beyond the top-line recovery in 2014.

Resorts, more than any other type of hotel, rely on revenues from other sources outside the rental of guestrooms. On average, the resorts in our study sample earned 43.8 percent of their revenue from sources such as restaurants, lounges, golf, spa, and retail outlets.

As of 2012, RevPAR levels were still down 7.1 percent from 2007. Concurrently, total resort revenue (inclusive of food and beverage and recreation) was off by 10 percent. This indicates that resorts have struggled to induce additional expenditures from guests once they check in.

Conversations with resort general managers indicate that the leisure traveler has returned to the market, while corporate and association groups are coming back at a slower rate. Groups that are traveling again for meetings and training have cut down on auxiliary spending such as spa and golf outings. Furthermore, groups that previously may have provided three meals for meeting attendees may now just provide two or will cut back significantly on all three. As corporate profits continue to rise, the hope is that meeting planner budgets will allow ancillary expenditures to return.

After suffering greatly during the initial stages of the recession, resort owners and operators can begin to relax and grab a drink by the pool. Increases in personal income and corporate profits have helped preserve travel budgets for high-income individuals and business groups—two of the largest sources of demand for high-end destination resorts. This has contributed to the recovery in revenue. Profits are also on the rise. Recovery on the bottom line is only a few years away.

Robert Mandelbaum is director of research information services, and Caroline Robichaud is a senior consultant with PKF Hospitality Research.

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