As with many of you, I just returned from the 2010 NYU International Hospitality Industry Investment Conference. If you were in attendance (or even if you were not), you have no doubt heard about the “wild optimism” that reigned supreme. From the CEO panel to the casual conversations that took place, the majority of attendees believed the next several years are going to rival some of the best years the industry has seen—not in absolute levels of performance, but certainly in the percent changes recorded compared to the long-gone and best-forgotten 2009.
Of all the reasons for the good feelings that abounded, perhaps the one most-referenced was the feeling the industry recovery from the depths of the recession will take the shape of a “V” instead of a “W” or a “U.” While in some ways the early performance results might indicate that, it might be a little too much of a simplistic look at the current conditions. What seems like a more realistic way to measure the shape of the recovery is to look at it in two pieces: demand and average-daily-rate growth.
Click chart to enlarge.
Click chart to enlarge.
Looking at it that way, it seems likely the demand recovery will be the “V” shape everyone is hoping for—one that is critical for the long-term health of the industry. However, the ADR component of the recovery is probably going to look more like a “U,” and maybe even an elongated one. So why is that?
One observation I have made after looking at the last three downturns and recoveries is that each hotel industry cycle seems more severe than the one before, both on the way down and on the way up. Each time the industry’s pricing reaction to changing demand is not only more-immediate but also deeper and longer-lasting. On the flip side, the pricing growth and acceleration during the recovery phase also exceeds prior recovery cycles.
I believe the “U” in the ADR recovery is already present; demand recovery is well under way, but ADR growth has remained elusive (see charts). There are a number of reasons for this, such as sluggish group demand, which in good times helps drive aggressive pricing for the transient traveler. Another is the shortened booking windows that now exist for both the transient leisure and transient business traveler. Absent a change in one or both of those factors, ADR growth, while imminent, might experience a slower velocity in the early stages of recovery.
Finally, we are only a few months away from corporate travel negotiation season. The hotel industry’s ability to successfully negotiate fair and upwardly driven rates will probably play a pretty big role in the nature of the rate recovery.