News for the Hospitality Executive |
By R. Mark
Woodworth March 18, 2011 Data
from Smith
Travel Research (“STR”) reveals that U.S. industry-wide average room
rates in
Q3 2010 experienced their first year-over-year quarterly increase since
Q3
2008. This outcome brought to an end an unprecedented two-year period
of severe
price discounting during which, in real terms, the average cost to rent
a room
returned to 1996 levels. This reality brings to mind a lament heard
often at
many industry conferences: “What if hotel managers had simply elected
to adjust
their room rates in sync with inflation – as opposed to discounting -
think
about how much higher prices would be today!” According
to
Wikipedia, a term for this mind set is counterfactual thinking, a
concept that
deals with the tendency people have to imagine alternatives to reality.
Humans
are predisposed to think about how things could have turned out
differently if
only ... and to imagine: what if? The unfortunate reality is that hotel
managers did not discount their room rates willingly. Their actions
were a
consequence of the most severe disconnect between the property (supply)
cycle
and the business (demand) cycle that occurred since STR began
collecting data
in the 1980’s. From 2007 through 2009, total U.S. lodging demand
decreased at
an average rate of 2.3 percent per year while supply grew by 2.3
percent per
year (per STR). Industry occupancy declined from 62.8 percent in 2007
to 54.5
percent by year end 2009 as a result. While
much
research has been completed that reveals discounting in the lodging
industry
rarely pays, the fundamental laws of economics support the notion that
excess
supply leads to declining prices. STR reported that the Average Daily
Rate
(ADR) for all hotels in the U.S. declined by 8.5 percent in 2009. This
phenomenon held true in each of the 50 U.S. markets that comprise the
Colliers
PKF Hospitality Research Hotel
Horizons®
universe. The range in outcomes during the period included an ADR
decline of
2.6 percent in Pittsburgh (the best performer) to a decline of 22.3
percent in
New York. Economic
theory
also holds that an inverse relationship exists between price and demand
- as
one goes up the other goes down. Analysis of the STR reported increase
in hotel
demand for 2010, when compared to the underlying change in the domestic
economy
suggests that low room rates likely contributed to the surprising surge
in the
volume of hotel guests during this period. Since price and demand are
related,
analysis of the Revenue per Available Room (RevPAR) statistic is more
appropriate than a singular focus on ADR. STR
reported that
the 2009 RevPAR for all U.S. hotels declined by 16.6 percent relative
to the
2008 level, and that the variance across the 50 Hotel Horizons® universe ranged from a
decline of 6.3 percent in Pittsburgh (once again, the best performer)
to a
decline of 26.2 percent in New York. In
contemplating
the question “What if?” all this price cutting in 2009 had not
occurred, it
seems appropriate to take into consideration market behavior leading up
to the
period which we now know was the worst performance year on record for
U.S.
hotels. To establish a framework for this analysis, the cyclical
conclusion of
the previous industry downturn appears to have been in 2004, when (per
STR) the
nationwide occupancy level approached long run average levels. Further,
since
STR began collecting supply, demand and revenue data in 1987, long run
average
(or trend) is defined as the period 1987 through 2004. Thus, the
counterfactual
exercise is as follows: “If
the change in industry RevPAR during the period 2005
through 2009 had approximated long run average levels, how would the
actual
2009 RevPAR amount compare to the hypothecated level?” Table
1 below shows
the results of this analysis.
Increased evidence continues to surface that the domestic lodging industry is once again on a sustained, albeit lengthy, road to recovery. Continued increases in demand, in concert with well-below average growth in available supply, suggest well-above average levels of performance. Using the March - May 2011 Hotel Horizons® forecast for the U.S., Table 2 illustrates a comparison of the expected levels of RevPAR for the period 2011 through 2015 to the counterfactual levels of RevPAR assuming that only the long run average rate of change is realized.
R. Mark Woodworth is president of PKF Hospitality Research. He is located in the firm’s Atlanta office. For more information on PKF-HR’s forecast reports, please visit www.hotelhorizons.com. Parts of this article were published in the February 2011 edition of Lodging. |
Contact: Mark Woodworth President PKF Hospitality Research 3475 Lenox Road, Suite 720 Atlanta, GA 30326 20170 (404) 842-1150, ext 222 Email: [email protected] |