Average daily rate (ADR) growth has been a topic of discussion and concern for many hoteliers and analysts as the U.S. lodging industry continues the climb back from the downturn of 2008-09. “Why is ADR growth so slow and when will we see acceleration?” is a question on the minds of many. Let’s take a look at the numbers to help sort out the ADR facts.
Without question, U.S. ADR took a major hit during the downturn. Beginning in October 2008, U.S. ADR suffered declines for 19 consecutive months, ending the long slide with an increase of 0.2% in May 2010. In 2009, ADR fell 8.7%—the largest U.S. industry decrease STR has ever recorded, and was flat in full year 2010. Prior to 2009-10, U.S. ADR had only declined in two other years—2001 and 2002, falling a total of 2.5% in those years combined. In short, the ADR declines suffered in 2009-10 were breathtakingly steep.
Since the ADR increase in May 2010, the industry has experienced 18 consecutive monthly increases, with October 2011 year-to-date ADR up 3.6%. In previous industry cycles, ADR growth has tended to lag occupancy changes. As the chart below (1) shows, ADR continued its momentum in 2005, even in the face of slowing occupancy growth. ADR’s gravity defiance finally ended in 2007 and followed occupancy’s plunge. Occupancy growth has now seemingly peaked but ADR continues to move north, though a flattening in the growth curve is evident.
ADR changes are very different between the STR chain scale groups. Upper-end hotels tend to demonstrate much more ADR volatility than mid- and lower-level hotels. The higher volatility results from a higher absolute ADR amount (more room to move), discounting, business mix changes and other factors that tend to be more pronounced at upper-end hotels. Midscale and economy properties can also experience these changes, but generally do not see the degree of ADR swings of upper-level hotels. At this point in the cycle, ADR growth at luxury and upper-upscale hotels is beginning to slow, while growth continues to accelerate, though modestly, in the other STR chain scale categories. Transient business has been a primary driver of ADR growth in upper-level hotels. October year-to-date transient ADR increased over 6% at luxury, upper-upscale and upper-tier Independent properties, while group ADR grew 3.5%. Transient ADR growth at these hotels is now slowing, while group ADR growth is holding steady.
Across the U.S., the coastal Middle Atlantic (+4.9%) and Pacific (+5.4%) census regions enjoyed the highest October year-to-date ADR growth. These regions are powered by large cities with a high percentage of luxury and upper-upscale chain properties. The “interior” census regions also experienced good ADR growth, ranging from 2.7% to 3.7%. For the most part, these regions have a higher mix of upscale, midscale and economy hotels, which usually means ADR growth in these regions will be lower. Over 90% of STR’s 94 U.S. metro markets experienced October year-to-date ADR growth, with over one-half of the markets enjoying growth of 3% or more. San Francisco led all U.S. markets with October year-to-date ADR growth of 14%, and all of the top 10 ADR growth markets enjoyed increases of 6.5% or better.
So what does all this mean—what’s the bottom line on ADR growth? Over the 23 years STR has tracked U.S. industry performance, U.S. industry average annual ADR growth rate has been 2.8%. STR is forecasting full year 2011 ADR growth of 3.6%—nearly 30% above the long-term trend. What’s causing the pain is not the current growth trend, but the tremendous hit that industry ADR took in 2009 followed by the “no growth” year of 2010. Check out the chart below (5) that tracks ADR growth from 2000 through STR’s ADR forecasts for 2011 and 2012. The yellow line shows how industry ADR would have grown had growth rates matched the annual inflation rate as measured by the Consumer Price Index. Remember, if you’re not keeping pace with inflation, you’re losing. It’s not the current ADR growth trends that have hoteliers concerned—it’s the lost ground many operators are scrambling to make up. Bottom line, ADR growth is dependent upon many factors and each hotel’s situation is unique. STR currently expects 2012 U.S. industry ADR growth of between 3.5% and 4%—again above the industry’s long-term trend and definitely moving in the right direction.
