HENDERSONVILLE, Tennessee—During the past several days there have been a lot of stories in the lodging, and indeed the general, press about the decline in lodging industry room rates during the past eight or nine months and how long it’s going to take to recover to pricing levels that existed at the end of last summer. Those addressing this issue have used STR data from the last downturn as a guide.
As with most data-related comparisons, there are two ways to look at this. The first is to just look at the absolute average daily rates while the other is to factor in inflation to see how long it took the industry to recover not only the absolute dollar amount of the room-rate declines but also to see how much longer before they were also able to cover the increased cost of doing business. I believe that using inflation-adjusted numbers is the more accurate reflection.
As the attached chart shows, it took the industry about four years to get back to 2000 room rates after the 2001/2002 recession. But when you use the inflation-adjusted numbers, it took more than six years to recover.
How long it will take this time is still anybody’s guess because we have not yet reached the room rate bottom and the industry probably will not get to that point until sometime late in 2009 or early 2010. In addition, it now seems certain that the level of pricing declines will be even greater and more broad based than the last downturn. When considering those two points, it seems virtually certain that it will take a bit longer to recover this time around, especially at the luxury end of the market, where the declines in ADR are much more severe than evident in the other segments.
Another important factor to consider when addressing this issue is the U.S. inflation rate in the coming years. Again, it seems like economic policy is going to dictate higher inflation rates in the coming years than in past recovery cycles. If this is true, then the lodging industry will recover to the absolute room rate much faster than it will to the inflation-adjusted room rate. However, this all guesswork at this point until pricing stabilizes.
Having said all this, it appears that many in the industry are studying the past and trying to put strategies and policies in place to try and accelerate this process in the coming years. During each of the past two weeks I have had the privilege to sit in and participate in sessions for two of the major lodging companies. In both of these meetings, pricing and how and when pricing power returns were front and center in the discussions. The discussions were focused and pointed directly at the future.
So while I often am accused of “beating the industry up” about it’s pricing, it is only fair to give kudos to those who recognize the issues and are preparing to accelerate the eventual recovery process.