HENDERSONVILLE, Tennessee—The U.S. hotel industry recovery coming out of the Great Recession has posed many questions about average daily rate.
The industry has sold more rooms than ever before each and every month since mid-2011. Supply growth has been minimal, and yet ADR has been much slower to recover than in past recovery cycles.
Occupancy, on the other hand, is nearing the 67.4% peak recorded in August 2006. (2012 ended at 66%.) This comes after a fairly significant decrease that began in 2008 and continued falling until 2010. When breaking down the data further into transient and group segments, it is not surprising the former, which has a shorter booking window, fell off first. Group occupancy began to decrease later as longer-term bookings burned off.
It is important to note that the data used in this analysis comprises the luxury, upper-upscale and upper-tier independent segments, for which STR, parent company of HotelNewsNow.com, tracks transient and group bookings. Performance is also based on a 12-month rolling average to eliminate issues with seasonality.
We also see that starting in mid-2009, transient occupancy recovered more quickly than group did. This is neither surprising nor very informative. However, when we take the same data points and look at group and transient as a mix of the total occupancy, an important long-term trend becomes clear.
Before the downturn, approximately 40% of total occupancy was delivered by group and 57% by transient. (The balance is “contract,” which is not reflected in the chart.) That gave transient a premium of roughly 17% greater mix than the group segment.
After the downturn, the industry has stabilized at a new relationship of approximately 35% group contribution and 62% transient—a 27% premium. On a closer look, the variance is actually growing as the months tick by.
Some markets are even more dramatic. Four of them are shown below:
Think about what this shift in mix means to each of these markets. San Diego went from an even mix between the two segments to a 20% premium for transient. Tampa, Florida, was even more dramatic with transient going from a 4% premium to 25%. Orlando, Florida, and Phoenix both saw group moving from the largest mix contributor to transient taking the lead. These markets are operating under very different circumstances today than they were just four years ago.
What is consistent across all of these markets—and rolls up to the national trend—is that the new relationship has been maintained over the past three years. There are many factors that could be contributing to this, from shorter meetings to fewer guests on peak nights to canceled corporate incentive meetings to government group being reduced and so on. There is no change in sight that would point to a fast return to the prior normal.
For that matter, the U.S. hotel industry has seen raw demand of transient rooms being sold at record levels each month. 2012 ended with 194.4 million transient rooms sold compared with the pre-downturn peak of 164.2 million. Group, however, finished 2012 with 106.1 million rooms sold compared with the pre-downturn peak of 110 million.
So even taking out supply increases during the past five years, there are less group rooms being sold on a 12-month rolling average basis than before the peak.
Understanding this underlying mix story, think about how that affects transient pricing. Typically, a hotel looks for a certain amount of base business to be on the books when the hotel hits the transient booking window. That base has not been in place on a consistent basis for at least the past three years. Without base business, the natural reaction is to “steal share” from your competitor hotels, usually though price-point reductions that might cause customers to choose you over them. Now we all know that your hotel is never the first to drop rate. All it takes is one hotel in the market to do so, then the rest fall in line and reset the normal positioning at the new lower set of rates.
Understandably, not all hotels in a given market are group hotels, or full-service hotels, or are even impacted by group business throughout the city or market. However, the hotels that are reliant on group typically have the ability to impact transient pricing throughout the market by being the pricing decision leaders. If they drop, their competitors drop, which causes their competitors to drop and so on. Eventually all hotels in the market are impacted by pricing decisions of the large group houses.
We are not saying this shift in mix is the sole cause of the slow ADR recovery. There are many other factors, but this is probably (definitely?) one of them.