The factors that drive the pricing of hotel rooms across the globe become more pronounced during a downturn, but the ways in which those factors play out have shifted due to the COVID-19 pandemic — a crisis like no other the hotel industry has experienced.

Some of those shifts, while greater in magnitude, are already following patterns established in past downturns, but time will tell if other changes will be longer-lasting or even permanent, according to Matthew Burke, STR’s regional manager, Pacific, and Hannah Smith, senior consultant at STR. STR is CoStar’s hospitality analytics firm.

During a session titled “Rate Psychology in the Pandemic,” as part of the online Hotel Data Conference: Global Edition, Smith and Burke discussed three key factors driving hotel pricing: Supply, demand and competitor behavior.

The “supply dynamic that has really set the COVID-19 crisis and its impact on the industry apart” has been temporary hotel closures, Smith said.

“We’ve never had closures to this magnitude and this widespread,” she said.

As an example, in London, more than 50% of hotels closed at the height of the pandemic between April and June 2020. As many of those hotels reopened, STR data shows they had less pricing power than hotels that remained open in the market.

“What’s important to see is that those hotels that temporarily closed were consistently underperforming even once they reopened,” Smith said.

Meanwhile, as temporarily closed hotels reopen and hotels currently in the construction pipeline come online, markets are expected to need more time to absorb that new supply, “which means occupancies don’t rise at the same pace, and that therefore puts downward pressure on average rate growth,” Burke said.

Another unique aspect of the pandemic has been the shifting of hotel demand from large downtown markets to smaller, drive-to leisure markets, which has had an effect on pricing power and rate recovery.

“As the harshest of the lockdown restrictions started to be lifted, people felt a little bit safer to travel but still wanted to stay relatively close to home. Those drive-to leisure markets started to see the benefits of that demand quite a bit earlier than other markets,” Smith said.

Hotels in destination leisure markets, which are a little less accessible, such as coastal Australia, did not experience as large of a hit to average daily rate as downtown hotels, “but certainly it took a little bit longer for the same level of demand growth to come back to these areas, and therefore that corresponding ADR growth we didn’t see until the end of the year,” she said.

Hotel markets that rely heavily on international travel and demand struggled overall in 2020. However, “there are some positive stories within that data,” Smith said.

For example, the Maldives is “one of those few exclusive destination areas that stayed relatively open to that international demand and so were one of the few options for people to travel to,” she said.

As a result, hotels in the market experienced a surge in rates through the summer and into the end of 2020.

Rates have resumed a more traditional pattern since January in the Maldives, with a predictable peak over the New Year’s holiday and holding steady otherwise.

“It’s still an open question as to whether this is a more temporary change in the evolution of how rate has performed or if there’s been a more structural change to it,” Burke said.

The data shows that people are willing to pay "for that experience of getting away" once it is safe to travel and people feel safe to do so, he said.

The data also shows that special events continue to drive hotel demand and therefore pricing power.

Events that drove hotel rates in 2020 included the Super Bowl in Tampa, Florida, and New Year’s Eve celebrations in Sydney, Australia.

Sydney hotels recorded the highest level of ADR in the year over the New Year’s holiday, though that level “was certainly diminished in 2020,” Smith said.

“The same was true with the Super Bowl,” she said, where limited attendance “also limited the pricing power those hotels had.”

Compression nights — when hotels are at 90% or higher occupancy — have always driven rate growth and are more than one-time events, but the question going forward is when will hotels achieve occupancy that high again, Smith said.

For the presentation, STR examined six global markets for which “compression nights could be happening a quarter to a third of the time … in normal times,” she said.

“Going forward, where some of these markets right now are struggling to hit even 50% [occupancy], what is it going to look like when you don’t have these compression days and therefore don’t have that corresponding ADR premium?” Smith said.

Hoteliers are also apt to base decisions on pricing on what their competitors in the same market or hotel class are doing.

That behavior is evident in data that shows the ADR gap between hotels in higher-performing and lower-performing areas and product types flattening during a downturn.

For example, in Boston, the downtown submarket typically commands the highest hotel rates. In the early 2000s, ahead of the Great Recession, hotels in downtown Boston had an ADR spread of about $100 over hotels in suburban areas. That spread shrank to about $66 during the recession, as hotels in downtown markets lowered rates more and hotels in suburban areas kept rates mostly steady.

The same flattening of the rate gap occurred during the Global Financial Crisis of 2007 to 2009, and also is evident in data over the past year of the COVID-19 crisis.

“That rate compression is now only a less-than-$60 spread between those suburban areas and downtown areas in Boston, where previously that was over $100,” Smith said.

The rate gap between hotel classes — luxury to economy — also has traditionally flattened during downturns.

“Looking at London specifically, but this holds true across a variety of markets,” the rate gap between luxury and economy hotels “is greater in booming times and it’s flattened in those recessionary periods,” Smith said.

But in 2020, that rate spread between luxury and economy hotels actually widened, she said.

“Economy hotels were dropping rate more than luxury properties that were actually in some growing rate or just remaining flat in ADR,” she said.

Burke said that phenomenon is driven in part by the leisure travel segment, which currently is dominating luxury hotels, particularly in London.

Leisure travelers put “greater pressure” on the amenity side, he said, including “more people around the pool, in the restaurants” and an expectation of service level that requires more engagement with hotel staff.

As a result, hoteliers at luxury properties are placing “greater priority, with that small demand pool, on average rate than occupancy," Burke said.

“That may well evolve as the different demand segments come back and with the evolution of options for the luxury traveler,” he said.