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.”