Finance & DevelopmentFinancePricing Trends: Class-Level Patterns and the Impact of Inflation

Pricing Trends: Class-Level Patterns and the Impact of Inflation

Over the past two years, class-level hotel occupancy has served as a proxy to track the recovery of different industry segments. The lower-tier, leisure-based classes have led occupancy recovery since the early days of the pandemic, while business and group-dependent upper-upscale and luxury hotel occupancy has been slowest to return. However, as class-level occupancy has served as a barometer for segmentation recovery, trends in average daily rate (ADR) have followed a different path.

Historically, pricing power followed demand, and the classes with the strongest occupancy growth also posted the highest ADR gains, but that pattern has not held following the pandemic.

Luxury Leading Rate Recovery

Despite posting the second-worst occupancy loss among the six hotel classes in 2020, luxury-class hotels reported the smallest ADR loss, with rate down just 6 percent from 2019. Luxury hotels maintained extremely strong rates throughout 2021 with full-year ADR—an astonishing $365.78—nearly 14 percent higher than its prior peak in 2019 even as occupancy remained 26 percent below pre-pandemic levels.

Key sources of pricing power have shifted over the course of the pandemic and contributed to luxury rate growth despite the low-demand environment. A shift in traveler type, from lower-rated group demand into higher-rated leisure guests, helped drive rates as well, as did staffing shortages, which necessitated increased employee wages and, in some cases, a cap on hotel occupancy.

May 2022 Drilldown Pricing Trends

Exceptionally strong leisure demand boosted pricing power to the already leisure-driven midscale and economy classes as well, while at the opposite end of the spectrum, upper-upscale reliance on business and group demand led to substantial demand declines and reduced ADR.

Upscale and upper-midscale hotels, meanwhile, struggled with high supply growth, opening a combined 54,000 new rooms in the 12 months ending February 2022, which held back rate as the market absorbed the new supply.

Inflation a Major Factor in ADR Recovery

Luxury-class hotels may be leading rate recovery, but rates have reached pre-pandemic levels extremely rapidly across the board, with all six classes reporting ADR above pre-pandemic levels year to date in 2022. While decreasing COVID concerns and the end to many pandemic-era restrictions have helped drive demand and, in turn, ADR, non-demand related cost concerns are the primary force behind this downturn’s strong ADR rebound.

The U.S. Bureau of Labor Statistics began reporting inflation ahead of the Federal Reserve’s target rate in April 2021, and although the higher price level was initially expected to be a short-lived reset as the economy emerged from the pandemic, continued supply chain shortages and volatile energy prices led to a nationwide inflationary environment.

Hotel rates, which are included in the basket of goods comprising the consumer price index (CPI), have risen alongside inflation as operators look to offset the rising costs of goods and services. As of February 2022, only economy and luxury hotels increased ADR when accounting for inflation. Real ADR in the middle four classes remained below 2019 levels, meaning that while the reported rate was higher than in 2019, the relative value of ADR and the purchasing power it represents has not fully recovered.

Conclusion

U.S. hotel recovery remains a work in progress, although confidence in hospitality’s return is at an all-time high in large part due to the strength of industry ADR. All six classes have pushed ADR ahead of pre-pandemic levels year to date, even as occupancy remains largely behind 2019 levels. With external pricing pressures like inflation at an all-time high, rate will continue to be the key to 2022 hotel performance success.

Kelsey Fenerty is a research analyst at STR.

Kelsey Fenerty
Kelsey Fenerty
Kelsey Fenerty is a research analyst at STR.

RELATED ARTICLES

BWH Hotels’ Soft Brands Empower Independent Hotels with Global Strength 

As travelers increasingly seek authentic, locally inspired experiences, BWH Hotels is meeting the moment with a diverse portfolio of soft brands that blend individuality...

Dreamscape Hospitality Assumes Management of Three Hotels in Houston

HOUSTON, Texas—Dreamscape Hospitality announced that it has assumed management of three hotels in Houston, Texas. "We are excited to deepen our presence in Texas through...

Hilton Announces Plans to Debut Spark by Hilton in Puerto Rico

PONCE, Puerto Rico, and MIAMI, Florida—Hilton announced the signing of Spark by Hilton Ponce, marking the upcoming debut of the brand in the Caribbean...

Wyndham Announces Partnership With Cygnett

DELHI—Wyndham Hotels & Resorts announced a new strategic alliance with Cygnett Hotels & Resorts that will not only introduce its La Quinta by Wyndham...

New Pyramid Global Hospitality COO Continues Focus on Big Data to Benefit Owners

Pyramid Global Hospitality Chief Operating Officer Eric Habermann retired in April following seven years with the company and a nearly 40-year career in hospitality....

Grand Hyatt Kauai Resort & Spa Launches Scholarship Program

Grand Hyatt Kauai Resort & Spa, a 605-room resort, announced the launch of a scholarship program to support the continued education of its colleagues...