HENDERSONVILLE, Tennessee—While the breadth and the depth of the current economic downturn have turned occupancy and average room rate performance into mush, we have begun to see signs that the bottom of the cycle might be near. While there certainly is no guarantee that this indeed is the case, because there are many ways to actually measure what the bottom actually is, we are reasonably confident that the most important variable in this lodging downturn, demand growth, or the lack thereof, has troughed.
The lodging industry’s demand decline was accented by two sharp, deep drops in the number of rooms sold. The first of which began early in the fourth quarter of 2008 lasting until December, when there was a short-lived improvement. This initial shock was caused by the fall of Lehman Brothers and was further exacerbated by the now-infamous AIG meeting debacle. These two events affected all aspects of travel, but initially the greatest impact was felt in leisure and business transient travelers.
Beginning early this year, the second wave of accelerating demand declines occurred. In addition to the already compromised transient traveler, the group business segment of demand began to cancel meetings at an alarming rate, due in no small part to the political rhetoric and fallout from what is now infamously referred to as the “AIG effect.”
But during the past six to eight weeks, we have begun to see stabilization in the rate of demand declines and in some segments even slight improvement. As the attached chart shows, even when factoring in the variability caused by the calendar shift in Easter, this year versus 2008, it is clear that the demand bottom finally might be here. When that data is considered in conjunction with the ever-so-slight hints that the U.S. economy might be showing signs of life, one becomes almost optimistic that the first hurdle to recovery for the industry is upon us. Once we become confident that demand has bottomed out, then an effort to shore up pricing is possible. From there the recovery can begin.
What is not so clear is how and when hoteliers will handle the rampant price declines that have washed over the industry in the past six months. While there can be no question that some of the price declines being seen were necessary and unavoidable, we continue to believe that the industry has collectively overdone the price declines, just as in the past downturn. In effect, pricing decisions were viewed only from the lens of how many guests were not coming as opposed to how many still were.
Historical data has shown us that it takes the industry years to recover from price declines of the magnitude now in evidence. In fact, after the downturn of 2001/2002, it took the industry six full years to rebound to ADR levels experienced in 2000. Hopefully, this time the ADR recovery will happen a bit faster.