HENDERSONVILLE, Tennessee—The luxury hotel segment in the United States has reported the most positive signs of growth coming out of this difficult economic cycle. Year-to-date through November, this group of hotels reported an 8.7% increase in occupancy and is the only chain scale (outside of independent hotels) to increase rates (by 1.6%). However, these increases still have not met previous peak levels of performance.
November year-to-date occupancy levels maxed out at approximately 72.5% during 2006 and 2007. Luxury occupancy declined in both 2008 and 2009, hitting bottom last year at 62.1%. The metric experienced healthy growth through November 2010 to 67.5%, though not enough to account for the 9.6% decrease felt in 2009.
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The increase of new luxury hotel supply outpaced new demand sources from 2007 through 2009 (year-to-date through November). But as financing for new hotel development became more challenging to obtain, luxury supply increases have moderated to 2.9% compared to the 11.8% increase in demand.
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Pricing also represents a challenge for the luxury segment. Average daily rate, though it has increased by 1.6% through November 2010 year-to-date, is still well below the peak ADR level of US$292 during the same period in 2008. In fact, ADR is more than US$20 below 2006 levels. Clearly, this is the best opportunity for the luxury segment to gain profitability.
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How does current pricing strategy affect total room revenue generated by luxury hotels? Pre-recession room revenue grew at double-digit rates before flattening out in 2008. As hoteliers began to slash rates during 2009, revenues declined by a whopping 17.9% through November year-to-date. Although there has been double-digit room revenue growth through November 2010 year-to-date, this 13.6% increase still has more room to grow to dig out of the revenue trough from 2009.
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The encouraging news for luxury hoteliers is there is limited new supply proposed for the immediate future. With only 776 rooms under construction—compared to almost 4,000 rooms under construction during the same period last year—the market has time to absorb the new supply added during the past few years. There are approximately half the number of rooms in the active pipeline phase at present (i.e., in construction, final planning or planning) than were reported as of November 2009.
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Luxury hotels are performing well and are leading the charge for the hotel industry to regain stronger profit margins. Hotel demand is back and growing, so with continued confidence in pricing increases, hotel revenue levels will meet and exceed highs from previous years.
