REPORT FROM THE U.S.—The rapid and record rise of demand during the recent upturn has overshadowed a more sluggish surge in average daily rate. And as the metric continues to decelerate as 2013 comes to a close, many fear hoteliers have left money on the table they’ll never get back.
“ADR is driving (revenue-per-available-room) growth, and we’re expecting exactly that for the foreseeable future. But is it too little? That’s the question that is on everyone’s minds,” said Jan Freitag, senior VP of global development for STR, parent company of Hotel News Now.
“I say it’s too little too late,” he said.
Post 9/11 the U.S. hotel industry saw occupancy and ADR decrease 6.7% and 4.5%, respectively, on a 12-month-moving average basis. Occupancy eventually recovered to a peak of 3.6% growth in February 2005, but ADR bounced back at a much faster clipping, hitting 7.5% growth for five consecutive months beginning in October 2006.
In this most recent cycle, however, occupancy recovered much more quickly and significantly, topping out with growth of 6.1% during February 2011. ADR petered out at only 4.3% growth in January 2013.
Click chart to enlarge.
“This is an opportunity lost. It’s also too late. We’re not going to change it now,” Freitag said.
Joe Smith, executive VP of Chesapeake Hospitality, agreed the window for further improvements is closing.
“I think we have at least one more full year. I’m not totally convinced we’re at the peak.
2014 is going to be another banner year. 2015? We’ll see,” he said.
Chesapeake’s 28-hotel portfolio has seen rate growth of between 4% and 6% in 2013, Smith said.
“I’ve gone through a dozen recessions in my lifetime. I found this one a little bit different,” said Gerald Chase, president and COO of New Castle Hotels & Resorts. “When you have a recovery, usually in the first couple of years you see some really dynamic, significant rate improvements. We did not have that happen this time.”
New Castle’s 24-hotel portfolio recorded rate growth of approximately 4% thus far in 2013, which was on par with executives’ budget forecast. Chase said growth was not as strong as he would have liked, but he’s bullish for 2014, budgeting for a rate increase of approximately 5%.
Year-to-date November, ADR for the U.S. hotel as a whole was up 3.9% to $110.07. During the same period in 2012, ADR was up 4.1% to $105.96, according to STR.
While ADR became the primary driver of RevPAR during 2012, some hotel companies are still focused on occupancy.
“We’re still in that occupancy mode,” said Tammie Taylor, VP of operations at Peachtree Hotel Group.
The reasons for sluggish growth are many, said Brian E. Bolf, regional director of revenue management for Kokua Hospitality, which manages seven hotels.
“Although the opportunity to have made greater gains is undoubtedly true, based on various geopolitical shocks, global financial instability, decreased group mix and a weak domestic government sector, hoteliers identified 2013 with a greater risk coefficient than desirable and continued many of their recession-driven occupancy strategies disallowing greater ADR retention,” he wrote in an email. “Combined with an increase of low-to-mid demand dates compared to high-demand dates, hoteliers in 2013 found their greatest potential to driving positive (revenue generated index) change through occupancy.
“In my opinion, money was indeed left on the table for many hoteliers,” he said, adding not all lost opportunity came in the form of rate but rather other contributors to overall profitability.
Market by market
The ADR story varies as vastly as the dynamics separating various markets throughout the country.
Of the top 25 U.S. markets, 10 have surpassed their prior ADR peaks, led by Oahu, Hawaii, with a $34.41 premium as of November, according to analysis from STR’s Chris Crenshaw, VP of strategic development.
Click chart to enlarge.
Certain markets have seemingly unlimited opportunity to drive further rate growth, such as Miami, where Jeff Lehman oversees operations of The Betsy hotel as GM.
“If the destination is evolving the way that we are in terms of infrastructure, attractions and hotel product, if those things are able to continue then I don’t see a (rate) ceiling,” he said.
The Betsy has recorded annual ADR growth of 15% to 20% since opening in April 2009, Lehman said.
But rate growth won’t come by itself, the GM acknowledged.
“There’s an illusion about hotels that you stabilize it, make it right, and then you just sit there maintaining it and everything will be fine,” Lehman said.
Bolf echoed that mentality. “The fact is that for the last few years following the recession, many hotels still have not improved their products, offerings or infrastructure to support a fuller rate capture at the increased occupancy level exhibited in 2013,” he said.
Property improvements alone are often not enough to overcome broader market dynamics, however, as evidenced by the fact that 15 of the top 25 markets that have yet to reach prior ADR peaks. Six of those still have to regain $6 in rate or more, led by New York, which is still $24.74 below its prior ADR peak, according to Crenshaw’s analysis using STR data.
All not lost
Not everyone is willing to write off the hoteliers’ ability to regain lost rate.
Taylor and her team at Peachtree are budgeting ADR increases of between 6% and 8% next year for the group’s 40-hotel portfolio.
“I don’t think we’ve hit anywhere near the runway in rate growth,” said the company’s director of revenue management, Gery Manthos. “That runway is very long.”
And while the industry has yet to see the level of rate growth that past history would suggest, Jack Corgel, professor at the Cornell School of Hotel Administration and managing director of applied research at PKF Hospitality Research, said there’s still hope.
“Historically we have not seen rate growth accelerate until after we get to and beyond the long-run average occupancy level. You build occupancy, then you get up to this long-run average and then you start picking up a little speed with rate growth,” he said.
STR pegs the long-run occupancy average at 61.7%. Year to date, occupancy for the U.S. hotel industry is 63.4%, which is 1.4% above the 62.5% recorded during the same 11-month period in 2012.
The data firm’s most recent forecast, released in September, projected occupancy to finish 2013 at 62.2% and 2014 at 63.1%.
“If you look at our forecast and anybody else’s you’ll see that the components of RevPAR shifting decidedly toward rate in favor of occupancy. Just hang on a little while longer. We may see that rate growth realized,” Corgel said.