NASHVILLE, Tennessee — Inflation is a double-edged sword for hoteliers, helping them push rates while also driving up their costs, cutting into profitability.
While it’s generally understood that inflation makes everything cost more, how that works out exactly requires more of a breakdown. During two sessions at the 14th annual Hotel Data Conference, data experts from STR, CoStar’s hospitality analytics firm, explained how inflation affects the different aspects of hotel operations and what that means for their profitability.
Inflation’s Effect on Hotels
The close relationship between general operating profit per available room and revenue per available room is something STR has been tracking closely for a while, said Raquel Ortiz, assistant director of HOST P&L at STR, during the “How Inflation Affects Your Hotel (And How Your Hotel Affects Inflation)” session. There’s also a similar relationship with total revenue per available room.
Over the long term, GOPPAR gains or losses are about one-and-a-half to two times that of RevPAR gains or losses, she said. Hotels have done well at minimizing profit declines during the pandemic by focusing on more efficient operations and lower expenses from lower demand.
“That has helped to quickly boost GOPPAR throughout the pandemic, and now it’s at triple-digit percent change levels,” she said. “However, that sharp increase does not take inflation into account.”
While the correlation among these key performance indicators stays relatively the same, the actuals do not show as strong of improvements, she said.
Nominally, year-to-date numbers are still down across the board from 2019 roughly 10% to 12% for total revenues, GOP, earnings before interest, taxes, depreciation and amortization and total labor, Ortiz said. On a monthly basis, profit levels have surpassed 2019 levels since April. As of August, TRevPAR also passed 2019 levels. Labor is the only one that hasn’t.
On a real basis, these key performance indicators have yet to recover, she said. GOPPAR and EBITDA per available room indices are at lower levels now than they were in May because of increased service offerings, higher expenses and inflation.
The top line for year-to-date June 2022 compared to 2019 shows the percent change is now about 20% losses compared to 2019, Ortiz said. Focusing in on TRevPAR total revenue since 2019, peak TrevPAR was achieved in October 2019 at $230. While demand and rates have been higher over the last year, hoteliers haven’t reached that on a nominal or real basis. It nominally was close in June at $226, but on a real basis, TRevPAR was $196, meaning inflation shaved off $30 of total revenue in June.
“What is also interesting to see is that even though nominal TRevPAR increased $6 in June from May, real TrevPAR only increased $3,” she said. “Inflation is really stalling any real progress.”
How Inflation Affects ADR
Nominal average daily rate is what’s reported and what’s in the STAR report, said Kelsey Fenerty, senior research analyst at STR, during the “Effects of Inflation on ADR” session. It’s talked about in actual value. Real ADR is when the price is held constant, a price level fixed at some point in time.
Inflation reflects the rise in prices over time, and it’s normally about 2%, she said. It’s easier to discuss as a percent change to see the growth in the real value of a good or service over time. That also applies to purchasing power. The Bureau of Labor Statistics' consumer price index helps provide the data needed to calculate real value.
Occupancy growth today is directly correlated to nominal ADR growth four to six months in the future, Fenerty said. The confidence hoteliers have today leads them to increase their rates in the future. This is where real ADR comes into play because the impact today of raising rates now is increasing real ADR.
“You can think of it as your pricing power,” she said.
Hotels’ occupancy rates today reflect real ADR growth today and nominal in the future because hoteliers have some confidence they can increase their rates in the future, she said. As the real rate rises today, hoteliers increase their rates in the future. The market will adjust to that new higher rate as other hotels raise rates as well.
“That's inflation, isn't it?” she said. “Prices grew because demand grew. The nominal ADR is reflecting inflation, it's reflecting what's happening today, but it's down the line. Your real ADR is reflecting what's happening today as it grows.”
Hotels’ nominal ADR growth is high today relative to demand, and that’s because their pricing power is based on what has happened in the past, Fenerty said. Demand growth is high currently because last year’s wasn’t great, allowing hoteliers to increase their rates, growing their nominal ADR.
By adding in real ADR, it tracks closer to demand growth because it’s reflecting the pricing power that hoteliers’ feel today, she said.
In a downturn, rate is usually the slowest to recover, and real rate is even slower because hoteliers have higher prices to contend with, Fenerty said. It took six years for real ADR to recover following 9/11, roughly a year before the Great Recession. After that downturn, it took about eight years for real ADR to recover.
It only took 24 months from the worst of the COVID-19 pandemic in April 2020 for real ADR to reach its pre-pandemic levels, she said.
‘Twenty-four months — that is no time at all in economic terms,” she said. “That’s the very, very short term.”
The industry has been bouncing around fully recovered real ADR at the national level for about four or five months, she said. It’s an extremely strong rate recovery when looking at it from a nominal or real perspective, she said.
To apply that to an individual basis, that means finding the percent when indexing the CPI today against the corresponding month’s CPI in 2019.
“What's that percentage? Because that's the percentage you need to increase your ADR in order to grow real ADR, in order to realize the true pricing power and increase the purchasing power of your rate,” she said.
The inflation rate compared to 2019 is 16% now, but as inflation moderates, it will make its way back to the regular rate of about 2%, she said.
Looking back at CPI’s historical data on the rate of “other lodging,” which includes hotels and motels, could be similar to ADR growth, she said. That rate grows, moderates and slows, but it doesn’t decline.
“High inflation does not automatically mean that we're going to come back to where we were previously or that we're going to lose the rate that we gained during this high-pricing period,” she said.
In other words, the industry is at a time in which its baseline ADR is resetting, she said. The rates hoteliers have today are going to stay, and while the industry will go back to more moderate growth levels over time, it shouldn’t crash short of any other kind of global crisis.