The growth of limited-service hotels in the upscale and upper-midscale classes has outpaced other classes, and this requires a closer look to see whether rate growth stacks up.
HENDERSONVILLE, Tennessee—The U.S. hotel industry has grown supply in the last couple of years at a rate well below the historic long run average of about 2.1%. That said, the supply in the limited-service classes of upscale and upper midscale has outpaced all other classes by a wide margin. At the same time, we and other analysts have commented on the lack of pricing power that the industry currently exhibits even though occupancies and room demand are at record levels.
For this article, we examine the growth in supply and average daily rate through November 2018 and indexed it to January of 2010, a somewhat stabilized year after the most severe impacts of the great recession had mostly subsided. On a national level, the changes in supply when breaking out upscale and upper-midscale class hotels compared to all others are staggering.
Chart 1 shows that upscale and upper-midscale classes grew by more than 25% when compared to 2010 whereas for all other classes it barely grew at all (+1%). Part of what drives this very small change is the decrease in economy independent hotel room count which counters the increases in the other classes.
At the same time it is clearly obvious that that room rates have grown, but not equally, across the board. Upscale and upper-midscale classes combined grew ADR by 28%, but all other classes grew ADR by 36%.
In Chart 2, we are plotting the time series back to 2010 and the following picture emerges:
The two obvious observations are that for upscale and upper-midscale classes a) rate growth lags continually and b) since 2017, the ADR growth trajectory has slowed somewhat. In early 2014, the difference between the two indexed values was only 3% (113% and 110% index value, respectively) but that delta grew to 5% in January 2017 and stands at 8% today (135% vs 127% index value, respectively).
Market level observations
Base on the national data, can we infer a relationship between the strong supply growth in upscale and upper-midscale chains and their timid ADR growth? We examined all 165 markets and for the majority of markets the statement holds true: Upscale and upper-midscale supply growth is higher and ADR growth is lower than for the other classes. We observed this pattern in 103 of the 165 markets. Here are some noteworthy examples:
So, ADR growth is positive across the board, but results are mixed. In some instances, the rate growth over the last eight years for upscale and upper-midscale hotels has been minimal (Pittsburgh and Houston), but for other hotels in those markets it has been quite healthy.
There are 53 markets where the opposite is true, a higher supply index is not connected to a lower ADR growth index. In other words, in these markets the larger influx of limited-service hotels has not limited ADR growth, and actually hoteliers in those two classes were able to increase their ADR faster than in the competing classes. Here are five noteworthy markets:
The data shows that that in those large markets the difference between ADR growth rates is actually quite small, and one could argue that the room rate increases were mostly on par. In the remaining nine markets, upscale and upper-midscale inventory grew slower than supply in the other classes.
When only examining the top 25 markets, the trend is roughly equal to the observation in the national data. Eighteen markets showed that with stronger growth in upscale and upper-midscale hotels, less ADR growth materialized compared to other classes. Seven markets reported ADR growth higher in the upscale and upper-midscale classes.
The main takeaway from this data is that since 2010, upscale and upper-midscale rooms have proliferated while other classes hardly grew room inventory. Room rate growth seems often to be impacted by this new supply. ADR growth rates were lower in 66% of markets where upscale and upper-midscale class hotels grew faster than other class hotels. It stands to reason that in a majority of cases, an influx of limited-service hotel rooms in the upscale and upper-midscale scales can impact ADR growth negatively.
Jan Freitag is the SVP of lodging insights at STR. Tingting Duan is a research analyst at STR.
This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.