Age-related ADR premiums: Fact or fiction?
 
Age-related ADR premiums: Fact or fiction?
14 JUNE 2019 7:27 AM

STR explores the theory that newer hotels attain higher rates than their older counterparts with an in-depth analysis across time, class and chain scale.

HENDERSONVILLE, Tennessee—Popular hotel lore holds that new properties command higher average daily rate than their older counterparts.

To test this theory, STR analysts looked at the percentage difference in ADR between two- to five-year-old hotels and 15- to 20-year-old hotels over a 12-year span to determine if newer hotels command a premium over older properties. (STR is the parent company of Hotel News Now.)

Analysts tracked the age of all open hotels in the U.S. from 2007 to 2018 and studied only hotels that fell in two cohorts—hotels aged 2 to 5 years and hotels aged 15 to 20 years—in a given year, comparing ADR by class and calculating the percentage difference in ADR in the two cohorts.

Over the 12 years studied, younger hotels consistently commanded higher rates than older properties during expansionary years. Luxury and economy class properties experienced the most ADR volatility in relation to age, with high premiums for younger hotels in good years and negative premiums favoring older hotels in recessionary and recovery years. Independent hotel ADR was more affected by age than chain hotel ADR.

Age-related ADR premiums do exist
The chart below shows ADR for hotels between 2 and 5 years old compared to properties between the ages of 15 and 20 years in 2018. Luxury and economy class properties saw the largest premiums for newer hotels, with 2- to 5-year-old hotels enjoying rates more than 15% higher than 15- to 20-year-old properties of the same class. Upper-midscale properties have the smallest age-related premium, with newer hotels seeing rates 9.2% higher than older hotels.

Premiums vary by class
During the Great Recession and in the aftermath, age-related ADR premiums of luxury and economy class properties behaved very differently, with 15- to 20-year-old hotels seeing much higher rates than 2- to 5-year-old hotels. As the economy began to recover in 2010, 15- to 20-year-old luxury hotels charged nearly 27% more than 2- to 5-year-old luxury hotels. Only four years later, younger luxury builds experienced a 43% rate premium over older hotels.

Economy hotels experienced similar volatility; while younger hotel rates fell 20.5% compared to 15- to 20-year-old hotels in 2010, the reverse occurred in 2014. Economy properties aged 2 to 5 years charged 20.8% more than their older counterparts.

The other four classes have not seen such extreme age-related premiums or shifts in premiums. Upscale and upper-midscale class ADR premiums of younger hotels have been both the most consistent over time and the least affected by the recession, averaging 7.5% and 8%, respectively, for the past 12 years.

Checking in with chain scale
Flagged properties exhibit the same trends by scale as by class, although the trends are more muted, with upper-upscale through midscale chains exhibiting stable premiums with moderate growth for recently opened hotels from 2009.

Independents, however, experience a trend not found at the class level or shared by branded properties. Younger independent properties experienced ADR over 28% higher than older independent properties in each of the last 12 years; in five of those years the premium topped 40%.

Comparing branded properties to independent properties sheds light on this phenomenon. At the aggregate level, both independents and chains have maintained positive age-related ADR premiums for newer hotels. Independent hotels encounter greater age-related returns in ADR compared to brands in all 12 years studied, suggesting that property age is less of a concern for branded hotel guests.

Takeaways
Folklore often has some basis in truth, and the tale of new hotels charging higher rates than older hotels rings true. Hotels between 2 and 5 years old consistently command rates in excess of 15- to 20-year-old properties across class, scale and time. Independents are disproportionately affected by this premium, and luxury and economy class and scale see the most variability, particularly in relation to economic conditions.

Kelsey Fenerty is a research analyst at STR.

This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.

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