Despite peak occupancy, U.S. hotels are suffering from stagnant rate growth. STR data shows the “rate paradox” is affecting properties across chain scales and hurting new supply.
NASHVILLE, Tennessee—While U.S. hotels have enjoyed sustained occupancy peaks late into the current cycle, average-daily-rate growth is nowhere near as high as past cycles.
Carter Wilson, VP of consulting and analytics at STR—parent company of Hotel News Now—and Jack Corgel, managing director of CBRE Hotels’ Americas Research, sought to determine if any data patterns emerge in U.S. hotels’ lack of pricing power during “The rate paradox: A historical analysis of ADR behavior” at last month’s Hotel Data Conference.
At the conference’s closing general session, panelists debated some of the causes of stagnant rate growth, like franchisees slashing rates to achieve high-occupancy incentives, loyalty programs, rate transparency and the fight against online travel agencies and alternative-accommodations platforms.
Here are four takeaways from the data Wilson and Corgel presented on the rate phenomenon.
Defining the ‘paradox’
The gap between occupancy and ADR growth began to form around the second quarter of 2015, Corgel said.
“If you look back in history, you don’t really see that. … This seems on the surface to be unprecedented, and you can see we’re at historic occupancy rates at this point,” Corgel said. “The previous occupancy peak was just last year and it keeps growing, but it’s very much leveled off. … I think there’s evidence presented so far that this isn’t something typically that we’ve seen in history. This is an unprecedented, unusual event.”
Affected chain scales, hotel locations
Rate growth lagging behind peak occupancy levels seems to affect the majority of hotel chain scales, Corgel said. Luxury, upper upscale, upscale and upper-midscale hotels all have similar performances gaps between occupancy and ADR growth.
“The quarter that this separation seemed to appear (in the luxury segment) was quite a bit earlier than the rest of the nation,” Corgel said. “So something was happening between 2012 and 2015 that’s driven a wedge between real ADR growth rates and occupancy and has certainly showed up significantly in the luxury segment. And you can see the previous historic peak (occupancy) was in 1998, and we’re right about at that now.”
Hotels in urban, suburban, resort and airport locations appear to have taken the biggest performance hit from stagnant ADR growth, Corgel said.
“There’s a tremendous occupancy peak that we’ve reached in urban, and taking a look at suburban, there’s still white space there though it’s not as pronounced as it is for urban,” Corgel said. “It might suggest, as we all know, that there’s been a lot more supply growth in the urban locations, so maybe there’s something going on there.”
Historical rate growth was better
According to STR data, the average annual ADR gap between hotels with consistent high occupancy (greater than 75%) and low-occupancy hotels (less than 75%) was larger in past cycles. Wilson said between 2014 and 2017, high-occupancy hotels (+2.7%) have only seen a bit more rate growth than low-occupancy hotels (+2.3%).
“Just having a high occupancy does not mean you’re going to get a much more dynamic rate growth in this cycle,” Wilson said. “The high-occupancy hotels weren’t really commanding much more rate growth than the low occupancy hotels, that spread is very low. Contrast that to the ’90s. First of all rate growth was much higher in the ’90s … and the spread between high- and low-occupancy hotels was much larger.
“Back in the ’90s, if you had a high-occupancy property, you did have more pricing power; you were able to revenue-manage and somehow drive stronger rate growth than if you were a low-occupancy hotel. We’re not seeing that so much in the last few years; that difference is pretty marginal.”
The pricing power of new supply
The U.S. hotel industry reported more than 190,000 rooms in construction as of July, which is a 0.8% year-over-year increase. Wilson and Corgel studied the average annual rate growth of new hotels opening—excluding their first year of operation—and found that hotels opening in the current cycle have less rate growth than in the past.
“When we look at the current cycle, the spread between new supply rate growth and existing supply rate growth, new supply is actually weaker,” Wilson said. “New hotels are having more trouble growing rate right now in this cycle than existing hotels—2.5% to 1.7%.”
Wilson pointed to the types of properties being built now are in similar chain scales to those that opened in the mid-2000s: upper-midscale and upscale hotels.
“When we look at the mid-2000s when a lot more hotels were coming in, new hotels and existing hotels actually grew rate at the exact same pace and at a much higher pace—6.1%,” he said. “To put this in perspective … If you built a hotel and opened it in the mid-2000s, you are experiencing about 6% average annual rate growth. If you’re doing it today, it’s about 1.7%. It’s a phenomenal difference.”