HENDERSONVILLE, Tennessee—As STR, parent company of HotelNewsNow.com, continues to report record-breaking demand (including more rooms sold than ever before in the first five months of 2012), the question inevitably turns to pricing and the average-daily-rate recovery. In this article, we examine the relationship of ADRs in the top 25 largest U.S. hotel markets (excluding Las Vegas) to prior peak and how the return of the business and leisure traveler has influenced pricing power across these markets.
Chart 1 shows that all markets have achieved higher ADRs when compared to the lowest ADR in the years 2008 and 2009. This is probably not surprising since absolute occupancies have risen and the overall room demand recovery is evident across the nation. What is surprising, perhaps, is the magnitude of recovery in absolute dollar terms. Only eight of the markets were able to increase their ADR by more than $10. And it took Atlanta and Norfolk, Virginia, some four years to increase their ADR by just under $2. A reliance on lower group and government per diem rates is probably to blame. In contrast, New York and San Francisco had stellar recovery runs and increased their ADRs by approximately $30 since September 2008. The return of the business traveler and an influx of foreign tourists are probably reasons for the strong ADR recovery in these markets.
Chart 1:
Click chart to enlarge.
While the absolute dollar recovery is in some instances impressive, a more commonly asked question is how the current data compares to the highest prior ADR. A very different picture emerges in Chart 2, which shows the percent above or below the prior peak. In fact, only New Orleans and San Francisco have surpassed their prior ADR peaks, with Oahu, Hawaii; Nashville, Tennessee; St. Louis; and Miami less than 2% off from matching their prior records.
It is interesting to note that the warm weather group destinations Orlando, Florida, and Phoenix are still struggling mightily; their ADRs are still more than 10% lower than they were reported at the prior peak. Lower group rates may be to blame for this phenomenon. Detroit hoteliers, who have continued to struggle to fill rooms, also are still selling their room at a 10%-plus discount. And New York room rates, despite the above mentioned impressive gains, are still some 13% below peak.
Chart 2:
Click chart to enlarge.
Chart 3 shows the same data points, only this time expressed in dollars. What stands out immediately is that New York hotel rooms, despite being $33 more expensive than in late 2008, are still $35 cheaper than they were in 2007. In other words, New York rooms are still a relative bargain (if that is the term you want to use for a market with a $248 year-to-date ADR). In 15 markets the discount from the prior peak is less than $10, and given the healthy ADR increases we forecast for 2012 and 2013, we likely will report new record highs for a number of markets in the next two years.
Chart 3:
Click chart to enlarge.
It is encouraging to observe that ADRs are increasing. Therefore, hotel profitability in 2012 is likely to increase as well. Depending on the market, the healthy increases in ADR have yet to make up fully for the discounts that hoteliers inflicted on their market-wide rates during the 2008 and 2009 downturn. But as demand numbers continue to show healthy gains across all segments of the industry and new supply remains muted, pricing power should continue to buoy ADRs for this year and next. New records are also expected.
