HENDERSONVILLE, Tennessee—I am just returning from last week’s Hunter Hotel Investment Conference in Atlanta. I think it is now fair to say that spring is officially here. True, debt lending still seems to be in a deep freeze, but that did little to ease the enthusiasm of operators and investors looking for the next big thing, read: deal. The data from Mark Woodworth at PKF and our data clearly show that the industry is past its trough and that demand increases are sustained. Steve Swope from Rubicon furthermore showed that his forward-looking data now hints at strong average daily rate increases in 2010.
Along those lines, the debate keeps continuing if the demand increases of the recent past were really a “false positive,” induced by steep rate cuts across the board. There probably is an argument to be made that a traveler has a certain budget in mind and forces her or his lodging choice to fit within that budget. And as ADRs kept tumbling, a traveler using a midscale property in 2008 may have shifted to an upscale or upper-upscale accommodation because that was now equally affordable.
Operators are now wondering how fast they can increase rates without alienating the new-found demand and without killing this fragile plant named “recovery.” In discussions around the conference, I had the distinct feeling that while operators feel positive about their product, their market and the lack of new supply, they were still skittish when the topic came to raising rates. Most of the operators are tinkering with rate increases on the margins but that seems to be less the outcome of strategy than of launching trial balloons.
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Well, I am here to tell you that our data shows that all this individual tinkering is having an impact; rates are increasing, and in some cases with a vengeance. So rather than comparing the current ADRs to the peak numbers of 2007 or 2008, we examined the rates compared to the low point in 2009 and 2010. Perhaps a bit surprisingly, rate increases for most chain scales in 2010 have been strong and show no sign of easing. Total U.S. rates are now 5 percent higher than they were at the bottom, which was only three months ago (we are not suggesting that the implied annualized growth rate of ~20% is actually achievable, but, hey, a boy can dream, no?). On the upper end of the market, ADRs have increased at double-digit pace, and hotels in the upscale and midscale-without scales are also on their way to seeing double-digit increases from the lows earlier this year.
But the big question then is: What happened to demand? And the answer is: Nothing. Actually, the answer is not really “nothing,” but that on a 28-day average basis through 16 March, our demand numbers show sustained increases when compared to last year. Rates increases had no adverse effect.
When Woodworth, Swope and I left the stage at the Hunter conference we debated among ourselves the key message that ties all three presentations together. And we agreed on this: “Trust the data!” The most recent increases in rate have had no direct impact on demand, demand is here to stay, and confident rate increases help everyone. Trust the data!