Every year, hotel organizations and analysts release their numbers comparing the performance of hotels against prior few years and make projections of performance moving forward. These projections generally measure the change in the percentage of a hotel’s occupied rooms, the average daily rate of those hotels, and the combination of those two numbers, the revenue per available room. In a sense, they’re the building blocks of our industry and one of the easiest and best ways to measure the health of the hotel market in general.
We were putting together a set of projections for a group of hotel managers to talk about market cycles in the context of the recovery, and we ran into a bit of a problem: Everything looks like it’s doing incredibly well because we’re comparing it against a terrible year last year. You can’t HELP but do better. Rather than just track change year over year, we thought we’d step back and take a broader perspective by digging as far as we could in our files to show the numbers in context.
Our data in this case went back to 1960 for the Chicago Metro Area, which started out with ADR at US$13.95 compared with 2010’s US$112.67. The statistics clearly show that while occupancies tend to fluctuate significantly in clearly defined cycles, rates for hotels exhibit a strong upward growth, eventually recovering from recessions stronger than they entered them. Or did they?
Click chart to enlarge.
Click chart to enlarge.
It got us thinking. If you factor out inflation, how much better are we now than we were in the past? The answer surprised us.
In 1960 dollars, hotel rates during the last 50 years have only seen a net gain of US$1.34 to US$15.29, or about a 10% increase for a substantially more sophisticated product. Even more surprising, at the peak of this cycle in 2007, inflation-adjusted dollars showed that the mid to late 1980s was the most expensive period for hotels—at least in the Chicago market.
Click chart to enlarge.
There are a number of factors that can account for this change in dynamics. Before this time period, there were basically city hotels and motels. Prior to the 1980s and even during recessions, hotel rates changed very little in general. While this isn’t an indicator of general health of the industry—many hotels nearly went out of business during the early ‘70s—it represented the standard practice of the industry to largely leave rates alone or reluctantly raise rates under duress.
The late ‘70s and early ‘80s represent the time when limited-service hotels started to gain traction and grew rapidly. Rates followed suit from about 1976 through 1986, increasing faster than even the rapid increase in cost of living.
1986 was the peak year for inflation-adjusted values, with hotels charging US$21.53, or US$7.58 more than in 1960, even when accounting for double-digit inflation; this represents a 54% gain over the base 1960 level and inflationary increases.
Prior to the 1980s, growth was low and steady. During the lead up to 1986, ADRs began to show increased susceptibility to the same extreme cycles of peaks and valleys normally associated with occupancy. This trend has continued through each of the last three recessions, first growing strongly during periods of economic growth, and then plummeting, with around a three-year recovery period from the bottom of the cycle to begin to increase significantly again.
Arguably most surprising of all, after adjusting for inflation, each recovery period has failed to reach the highs of the previous recovery.
Click chart to enlarge.
Click chart to enlarge.
I certainly wouldn’t change the way I do business over this information. After all, it’s just an exercise. And while I could draw a million conclusions from it, I’ll only offer a few:
1) Inflation is a big deal, and it affects both income and expenses.
2) It’s important to keep in mind that an increase in price doesn’t mean profit will follow suit.
3) Mostly, I think it serves to illustrate the point that IF hotels are more profitable today than they were 50 years ago, it’s not just because they’ve increased their rates. After adjusting for inflation, they pretty much haven’t. Rather, gains on the bottom line have come from efficiencies in operations, more limited-and focused-service products and revenue management practices.
Ric Mandigo is the senior consultant for TR Mandigo & Company, a Chicago-based hospitality consulting company with more than 40 years of consulting experience.
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