HENDERSONVILLE, Tennessee—Developers, once again armed with plenty of cash, are constantly searching for the next place to put a new hotel. Part of the deliberation, among many factors, is the market-wide room-rate growth. Steady average-daily-rate growth above the level of inflation can be seen as a proxy for healthy customer demand and is probably also an implicit indicator of ongoing profitability.
In the following tables, we examine the markets that have, over the lifetime of STR and the available data, performed most and least well. (STR is the parent company of Hotel News Now.) The data set includes 315 months of data, from January 1988 to March 2014. We examine markets that had the most or fewest months of ADR growth and also look at the compound annual growth rate to establish strong and weak markets with respect to rate increases.
The markets with the most months of ADR growth can be found not in the large metro areas but in the markets characterized by large areas, dominated by limited-service hotels and outside the major metros. What this implies is the South Dakota market registered ADR increases in 98% of all months on record. Because the CAGR of the rate of inflation for the 26 years is around 2.8%, hotels in these markets probably, on average, not only recorded healthy rate increases but also saw slow and steady increases in profitability.
When observing the markets with the most ADR growth in the most recent past (since the year 2000 or 171 months), a similar picture emerges. The CAGR of the rate of inflation was 2.5%, and the majority of these five markets were able to command price increases in excess of that number.
Hotels in the South Dakota market were able to increase their ADR during 97% of all months in the time period.
On the opposite side of the spectrum are the top five markets with the fewest months of positive ADR growth.
Nevada is at the bottom of the list. In our books, Nevada only had one single year (1999) with ADR increases for 12 consecutive months. Overall, we registered ADR increases in only 60% of the months back to 1988 for this market. It is also worth noting that with the exception of Scranton/Wilkes-Barre, Pennsylvania, the CAGR is well below the rate of inflation, hindering profitability.
When examining the most recent past, Scranton/Wilkes-Barre comes up short again with the fewest months showing ADR growth. The CAGR is negative, so not only are hoteliers charging less than they did in the year 2000, expenses likely are increasing quickly, making profit growth impossible.
The other markets on this list are registering some rate growth but in magnitudes that are too small to matter.
When looking at just the annual compound rate of ADR growth for this century, a few different markets emerge as clear winners.
North Dakota and Texas West, fueled by oil exploration, have registered tremendous growth in demand and therefore occupancy and ADR. That said, the new supply influx is taking its toll, and North Dakota registered zero months of rate growth between January 2013 and March 2014. On the opposite side of the supply equation are the Hawaiian islands with limited construction activity and healthy demand growth from the United States and abroad. Hoteliers there have been able to capitalize on the sellers’ market and are able to increase the room rate well above inflation, even though Hawaii prices are normally a bit higher than on the mainland.
On the other side of the spectrum, here are the five markets with the lowest CAGR of ADR growth:
Scranton/Wilkes-Barre makes the list again, as does Detroit. It’s probably expected that markets with the fewest months of ADR growth also have small ADR growth rates in those months.
Within the top 25 largest hotel markets, Oahu Island and Miami have been able to increase their ADRs the most over the last 14 years.
Interestingly, the greater Los Angeles area, including Los Angeles/Long Beach and Anaheim/Santa Ana, also have among the highest performance. Nashville, Tennessee, despite only able to raise ADRs 118 months (69%) in the last few years, made the list of the highest increases but was still not able to beat the rate of inflation.
Those markets in the top 25 list with the lowest CAGR inflation probably exacerbated already poor performance.
Detroit’s ADR today is flat with the performance in the year 2000, likely caused by the lack of room demand during the recession. New supply probably hurt hoteliers’ pricing power in the other metro markets, and with more new rooms on the horizon, pricing power will probably remain elusive.
In summary, the performance of U.S. markets during the past 27 years has shown that all markets reported ADR gains most of the time, but compound ADR growth in excess of inflation remains elusive for most but the most competitive markets. Investors with a long-term horizon and an appetite for slow and steady growth would do well focusing on hotels outside the major metro markets to capitalize on the possibility of prolonged ADR increases.
Special thanks to Ali Hoyt from STR Analytics for running the numbers.