High demand from leisure travelers has given hoteliers more pricing power in this economic recovery than they've had in past cycles, but there are a few wrinkles to the higher rates, according to Jan Freitag, national director for hospitality analytics for CoStar Group.
"This recovery is fascinating because of the rebound in room rates," he said. "Traditionally, room rates recover much slower than room demand. In this recovery, however, room rate and room demand are recovering at roughly the same pace, and annual [average daily rate] is only $6 below where it was two years ago."
He noted that at this pace, nominal ADR is expected to reach 2019 levels by 2023. However, adjusting for inflation, ADR will not return back to pre-pandemic levels until 2025, he said. That means even if hotels are charging 2019 rates, they will not be high enough to offset higher costs.
Rate recovery is also expected to slow, according to the latest forecast by CoStar hospitality analytics firm STR and its partner Tourism Economics.
"You can see in the forecast to 2024 that room rate growth is slowing. This will be a function of corporate demand and lower-rated group demand returning to downtown hotels," Freitag said.
In other words, the return of business travelers and groups to hotels, which is necessary for the full recovery of the hotel industry, is somewhat double-edged in that those guests tend to negotiate and pay lower rates.
"Nonetheless, the American leisure traveler is expected to continue its strong demand, which should continue to give pricing power to leisure destinations," Freitag said.
The pricing power that leisure demand has afforded hotels is also evident in a comparison of weekend rates versus weekday rates.
The pricing gap between weekday and weekend rates has grown significantly during the pandemic, Freitag said.
"In 2019, weekend room rates were often slightly higher especially in [the second and third quarter]. That relationship has completely changed now, and weekends rates are between $5 and $25 higher," he said.
"The American leisure consumer has voted with their wallet to go to resorts and high-end destinations and those have been able to exert pricing power for quite some time now," he added.
For more of Freitag's analysis of the latest hotel performance and transactions data, watch the video above.