As U.S. hotel occupancy reaches an all-time high, industry
analysts are growing increasingly concerned about a concurrent drop in average
daily rate (ADR) growth.
According to STR data, U.S. occupancy hit a record 66.1% in
the first quarter of 2018. ADR gains, however, saw a dramatic dip beginning
around 2014 into 2015 and have since stagnated. STR now predicts rates will
increase 2.6% this year and 2.4% for 2019.
"There's a paradox, in that rate growth is anemic
despite all-time-high occupancy levels, and despite the fact that there's been
stronger ADR growth during high-occupancy periods in the past," said
Carter Wilson, vice president, consulting and analytics for STR. He added that
the steep discrepancy between the two metrics is unprecedented.
"Rates are growing, but they're only on pace with
inflation at this point," he said. "And inflation is increasing."
Exactly why ADR growth is failing to climb remains a
mystery, though Wilson said he believes it's most likely a confluence of
several larger trends. He cites the growth of OTAs, for example, as one
possible contributing factor.
"OTAs created a lot of transparency in pricing for the
consumer, making it easy to rate-shop," Wilson said. "So by simple
deduction, you can say that's been one of the causes, but that doesn't
necessarily explain why we're seeing an even more pronounced divergence between
occupancy and rate growth starting in 2014 and 2015."
ADR growth could also still be struggling to bounce back
from the 2008 financial crisis, when hoteliers frantically cut rates in the
face of plummeting occupancy. According to Wilson, customers might have since
been "trained" to expect lower prices, making it more difficult for
properties to return to higher rates post-recovery.
Jack Corgel, professor of real estate at Cornell University
and CBRE Hotels senior adviser, speculated that current revenue management
methods could be another culprit.
"Revenue managers are incentivized to boost occupancy
at expense of rate," Corgel said. "So they're pushing the buttons to
get higher occupancies, because they might get bonuses or other rewards if they
can get 100% occupancy. So this makes them willing to drop rate and get as many
people in the building as possible."
Maintaining high occupancy also works in a hotel's favor
when it comes to loyalty program redemption policies. Generally speaking, the
higher the occupancy is when a free stay is booked with points, the more likely
a hotel will receive a larger reimbursement for that redemption.
Other factors that could be keeping ADR growth low include
an overabundance of supply and the proliferation of home-sharing options.
"Cities are where you're seeing most of the supply
growth and most of the Airbnb activity," Corgel said. He added that
despite the phenomenon being widespread across all regions and hotel types,
high-occupancy urban markets are seeing a somewhat more marked disparity
between occupancy and ADR growth than suburban ones.
Even as both occupancy and demand remain robust, low ADR
growth could spell trouble when it comes to driving profit, Wilson said, adding
that focusing on occupancy at the expense of rate could give the industry cause
Also worrying is that occupancy's bull run could be nearing
its end, with STR recently reporting that the U.S. hotel industry saw a
year-over-year dip in occupancy for the first time in 12 months this July.
"Hotel and economic trends are cyclical, and we've
nearly been in the longest expansion cycle in history," he said. "So
everyone is trying to push profits while they can, but you're also battling
against wages and payroll. Labor costs are a huge concern for the industry, and
there's only so much you can expand in terms of occupancy; a lot of these
hotels are effectively sold out, so they can't get more money by selling more
rooms. So they have to do that by rate, and if they're unable to do that, then
it's tougher to grow profit, even in the midst of this massive expansion cycle."