How rising expenses affect real ADR growth
 
How rising expenses affect real ADR growth
10 DECEMBER 2018 8:52 AM

With an increase in expenses, especially when fighting for retaining labor and talent, hoteliers might need to exert pricing power in order to keep average-daily-rate growth from dipping.

HENDERSONVILLE, Tennessee—The latest 2019 STR forecast for average daily rate growth now stands at 2.4%. We anticipate this to be a very slight decline from 2018 when we expect the full-year ADR change to be at 2.6%. (STR is the parent company of Hotel News Now.)

This growth rate is slightly higher than it was in 2017 but well below the growth rates since 2011. In fact, between 2011 and 2016, ADR always grew at, around or well above 3%. Chart one shows that it seems that ADR change has stabilized around 2.5% or so and is certainly not expected to strongly accelerate in the near future.

So, ADR growth is positive and that is a good thing right? Well, revenue growth is one thing but in order for profits to grow the other side of the equation, expenses and expense growth in particular have to be taken into consideration.

A quick and easy way to think about expenses and their growth is took look at inflation, as tracked by the Consumer Price Index (CPI) published by the Bureau of Labor Statistics. (Inflation technically also includes a look at PPI, the Producer Price index, but this mostly includes manufacturing costs so we omit this here). When overlaying the quarterly CPI data with our quarterly ADR data and charting the difference, the following picture emerges.

The way to read this chart is that the difference between ADR and CPI—what we call “real ADR growth”—is mostly positive in the upmarket and very negative during the recession. In other words, in a positive market, environment inflation is the hotel industry’s friend since STR has always reported that the industry handily beat inflation, and real ADR growth often exceeded 4%.

However, during a recession, not only do expenses increase but also room rates decrease and this double impact then causes real ADR to decline. This pattern of very good and then very bad results seems to hold—except in the most recent past.

For the last six quarters the real ADR growth hovered around 0%. In fact, in the third quarter of 2018, the U.S. ADR growth was 2.1%, but CPI change was 2.6%, so real ADR declined 0.5%. Expense growth outpaced top line growth and that probably hits hoteliers’ ability to increase profits.

Of course, it is fair to nitpick at the above chart and state the CPI number is not actually the growth rate of expenses at hotels; hotels don’t buy movie tickets or jeans. True.

So thanks to our HOST (Hotel Operating Statistics) Almanac, which we publish each year, we can approximate a better total expense line item and the change from the prior year. Unfortunately, HOST data is so far only published annually so the latest data available is for the full-year 2017. But the same pattern as in the quarterly data seems to emerge. Not all hotels participate in the HOST program, so the data available here is a subset for a select number of hotels for which we have data back to 2011. As shown in the chart, their real ADR declined in 2015 and then again in 2017.

Going forward the path to profitability is clear: hoteliers need to either control costs more or increase ADR at a much stronger pace than before. Since the unemployment rate is expected to remain at around 4% or so, the fight for labor and talent will become more intense driving up hourly wages and salaries. Given that we are in the strongest demand and occupancy environment that STR has ever recorded, hoteliers should feel compelled to exert pricing power. But so far this seems not to be the case.

For 2019, we project ADR to grow. But will the small increase lead to much (or any) profit growth? I doubt it.

Jan Freitag is the SVP of lodging insights 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.

1 Comment

  • Ginger Sullo December 12, 2018 6:52 AM Reply

    Very concerning and needed article thats so little publicized in the media.

    What doesn't seem clear, is that if the pink box, e.g. 2017 -0.6% with expenses is then used to take off from calculating that year's 1.2% ADR growth????

    With the past year and a half having zero average ADR growth, and CPI has outpaced ADR growth, and figuring that the Fed will more closely monitor inflation/rate hikes in 2019, seems this glacial pace of continued nominal (e.g. stable) ADR "growth" is going nowhere..when contending with labor costs/benefits continuing to increase.

    The net margins will no doubt suffer...and owners will not have the returns that ripple over to RE valuations for selling.

    Interesting stuff...also the CPI is VERY skewed....look at ADOBI's digital pricing stats...which covers FAR more digital prices on consumer products (online) the the CPI which is more accurate OFFline thus, CPI is very underrated on what it covers/infers, ADOBE has about 50% more digital product pricing coverage (e..g the Amazon effect)...so the gov't inflation stat...is diluted as well.

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