Samples in Times Square and the Jersey Shore show no evidence of price gouging in the days surrounding Superstorm Sandy, according to STR Analytics.
BOULDER, Colorado—It seems that every time there's a natural disaster, we hear about price gouging within the hotel industry. There are always stories about limited-service hotels pricing their rooms at more than a thousand dollars or more than 200% to 300%. But what exactly is gouging, and when does it apply?
A hotel can change its rates by the second and will always react to periods of high demand by increasing its rates, but at what point is this deemed predatory?
Price gouging is generally used to describe pricing above what is considered fair, which is a tough definition for a product such as a hotel room, when demand can fluctuate wildly based on special events or emergency circumstances.
Further complicating matters is the lack of legal guidance. In New York, for example, price gouging is defined as anything sold at an “unconscionably excessive” price, but there are no parameters to define that. New Jersey prohibits price hikes of more than 10%.
Is it fair for hoteliers to charge double their normal room rates based on high demand due to a known special event? (Think staying in Times Square on New Year's Eve). Of course it is (assuming no collusion among properties), because the customer is aware of the special event and makes a cognizant decision whether or not to buy that room.
If travelers are stranded due to weather, can hoteliers double their rates the night before because travelers have little to no other options? Even if demand is high because of the weather event, one could argue that raising rates fits under the definition of gouging.
When exactly does gouging happen? When STR, parent company of HotelNewsNow.com, looked at overall Manhattan data for the week after Superstorm Sandy, there wasn't any concrete evidence of gouging in the overall numbers.
STR Analytics, sister company of HotelNewsNow.com, then pulled numbers for a smaller group of hotels, the idea being that if gouging occurred it would be more obvious with a smaller sample than the market as a whole. In this analysis we selected eight properties in the Times Square tract, all of which reported data during the analyzed period. We compared the hotels' aggregated average-daily-rate performance not only on a year-over year basis but also compared each day's performance with the trailing 12-month ADR for the group. The results are as follows:
Superstrom Sandy hit New York on 29 October. That night, the sample group of Times Square hotels posted a trailing 12-month ADR (blue line) of approximately $279. The actual ADR for that specific day was about $300, or 3% higher than the same date last year (red line). This is actually 12% higher than the same day-of-week last year, but in 2011 that day was Halloween, concurrent with the Halloween snowstorm that also hit the city.
A more telling metric is the rate of this period compared with the trailing 12-month average for the same group of properties (green line). The ADR for the 29th was approximately 107% the average rate for the trailing 12-month period (or 7% higher than the trailing 12-month ADR)—certainly no massive spike. Over the next few days this indicator rose, maxing out at 138% of the average 12-month rate on 2 November (or 38% higher). The question is, does a 38% premium indicate gouging?
Putting it in perspective, the answer is no. Looking at the same data over the course of an 18-month period shows spikes in rate much more severe, as illustrated in the following figure.
During the 18-month period, the trailing 12-month ADR rose steadily from approximately $261 to $280. In this period, the daily ADR performance of the Times Square hotel sample ranged from a low of $169 (5 February 2012) to a high of $443 (New Year's Eve 2011). The maximum rate achieved following Sandy's landfall was $383, which, while toward the upper end of this range, was not outside the boundary of what already was being achieved during the summer and fall of 2012.
Moreover, the maximum ADR premium of 38% compared with the trailing 12-month average after Sandy's landfall is less than what was achieved many times over in the past 18 months. This is not suggesting hotels didn't respond to high demand with higher rates during the period following Sandy's impact, but it doesn't appear these rate premiums were beyond normal for periods of high demand in the area.
We also analyzed data from an area harder hit by Sandy: the South Shore-Vineland tract of New Jersey. In this sample, we looked at daily data from a group of nine properties.
In this hotel sample, a rate spike is clearly seen on the day of Sandy's landfall, and the ADR was approximately 111% of the trailing 12-month average (or 11% higher). Rate premiums then softened and had another spike about a week later, reaching a 20% premium.
Again, putting these data in context with the past 18 months, a 20% premium is moderate compared with the typical 75% premiums seen on summer weekends in this area, as illustrated below.
During the 18-month period, the daily ADR performance of the South Shore-Vineland hotel sample ranged from a low of $43 (8 January 2012) to a high of $129 (4 August 2012). The maximum rate achieved following Sandy's landfall was $89, which certainly was higher than average for that time of year (and the highest rate achieved since 4 September) but still well below the weekend spikes experienced every Friday and Saturday night during the summer months.
Overall, in the case of these two sample sets of properties, there doesn't appear to be evidence of rate gouging based on Hurricane Sandy. And, while rates were clearly higher than normal, the premiums achieved still fell short of the premiums experienced throughout the course of a normal operating year.