Is this the lost decade of pricing?
 
Is this the lost decade of pricing?
07 NOVEMBER 2012 9:08 AM

Despite excellent fundamentals, hoteliers still are not able to increase room rates.

As I tirelessly crisscross the country to speak on the state of the United States hotel industry, my main talking points during 2012 have not changed. If you have not seen me on a friendly neighborhood stage near you, here are the cliff notes: Demand growth plus a lack of new supply equals occupancy increases, which should lead to strong room rate growth.

So far, so good … except it ain’t so.

At STR, we have always been cheerleaders for the cause of average-daily-rate growth to ensure a profitable and healthy industry. This, at times, has given our outside legal counsel discomfort since they feared our relentless push for pricing could be construed as a call for price fixing. But obviously we are never advocating a specific rate in any specific market, we simply urge hoteliers to keep the local supply and demand in mind when pricing their inventory. And as much as it pains me to admit this, no one is listening anyway.

When looking at the ADR increase from peak to trough over the last three cycles, a specific pattern emerges. In the 1991 upturn, room rate growth, slow and steady as it was over a five-year period, finally peaked at 6.9% on an annualized basis. After 2002, ADR growth topped out at 7.5%. But this time around? For the last four months we reported ADR growth on a 12-month moving average basis of 4.2%. The following chart shows the ADR growth trajectory after the last three recessions.

Is it me, or does it look like the growth curve has flattened out? Granted, 4.2% is a pretty healthy ADR growth number, but given where we were and how the industry performed in the last two recovery periods, the performance is somewhat underwhelming. When talking to owners and operators, they cite the ongoing lack of visibility going forward as an impediment to forceful pricing. The negative macroeconomic headline dampens the industry’s collective ability to price according to the strong demand that we report month after month.

In addition, the pipeline of new rooms is increasing, and we expect to see more limited-service hotels to open their doors in 2014 and 2015. So when these new rooms fight for guests in your backyard, pricing power will almost certainly no longer be as strong as it is right now.

It seems that I have to make peace with the idea that room-rate growth, despite excellent fundamentals, is not continuing to increase. Of course, growth is growth and growing ADR well over the rate of inflation should ensure ongoing profitability, but when looking back at this time from 10 years out, I am wondering if we will call this period “the lost decade of pricing.”

No Comments

  • J Ross November 7, 2012 7:02 AM

    You seem to be unaware that the economy is in close to stall speed if you eliminate the defense spending from last quarter GDP increase, and almost every corporation and traveler is being very careful of cost. True unemployment is still 14.7%. Layoffs are about to increase. The reason for higher occ is that rates are still relatively low, so some travel can be justified.Old economic theory- raise price lose demand. Econ 101, day one. The fundamentals are not excellent. You are ignoring the macro economic demand metrics which are poor and getting worse for many after the election, very slow GDP growth, and higher risk of fiscal cliff after last night. There is still Europe, Iran, Libya, gridlock, higher taxes coming, and all the other uncertainties you seem to be ignoring. That is why cash balances are at record levels. Most people are scared to invest or spend anything more than needed. Companies and individuals will travel if the rate seems a relative bargain to try to get whatever bits of new business there are, but raise rates too much as you push for ADR and demand declines. Rate is still percieved as a somewhat affordable which is motivating much of the demand, coupled with comnpanies need to get back on the road and sell. They just do not need to pay premium rates any longer. They have options due to good select service and other choices vs old time full service and luxury corporate travel of the past.

  • freitja November 7, 2012 12:36 PM

    Dear Dr. Doom:
    Thanks as always for your cohesive and well articulated theories. How boring would it be of all agreed, right? Even if I was congruent on interpreting the macro-economic picture – which I am not - I am continually flummoxed by the strong room demand numbers. You say that this is due to cheap rooms. I suggest it is caused by the inability of large corporations to spend their cash stash on capital improvements because of the perceived lack of visibility and hence travel and meetings see an uptick since that is the one line item that can be quickly rolled back when the sky starts to fall, as you so often forecast. But as the GDP growth numbers continue to meander along in positive territory and the unemployment rate of people with some college education hovers around 5% both corporate America and the US vacationers seem to hit the road, Jack. And add to that administration’s effort (aided by US Travel) to cut visa wait times and entice foreign nationals to visit these shores and this all adds up to record room demand figures. With that in mind all those positive signs seem to be good catalysts for room rate growth across the board, especially in the limited service sector that you favor. Let’s compare notes at ALIS and see if the light we see in the distance is a ray of a new dawn or the oncoming train of doom.

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