BROOMFIELD, Colorado—Much has been made of the pricing hotels have been able to achieve in the last 12 months due to occupancy levels hitting or surpassing previous peaks. But what's interesting is to contextualize the view of average daily rate by removing inflation from the equation.
Is inflation masking the current strength of ADR?
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The reality is, for the total United States, real ADR priced in 2014 about the same rate it did in 1999 and 2006. Inflation-adjusted rates don't change much over time for the typical U.S. hotel, which averaged about $109 going back to 1987. That long-term average, adjusted for inflation, has fluctuated little over the years, bottoming out at $99 in 1993 and reaching its apex in 2007 at $119.
In 2014, national ADR hit $115. While only three previous points of time had a higher rate, it still suggests there's further room to grow, and we're already seeing evidence of continuing rate gain through the first two months of 2015.
How does real rate look by market? If we extract data for the top 25 markets, most follow a similar trend, though New York City stands out in terms of its premium and volatility.
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New York City, represented by the top red line, experienced historically sharper peaks and valleys than the average top 25 markets, through its rate growth has been more anemic since 2010. By contrast, Oahu Island, Hawaii, represented by the purple line immediately beneath New York City, has seen surging growth in its real ADR in recent years. Oahu’s real ADR reached an all-time peak in 2014, one of only five markets to do so.
The average top 25 market achieved 2014 ADR levels about 9% below their peak levels, in real terms. The five markets that reached peak levels of real ADR in 2014 are:
- Los Angeles/Long Beach, California;
- Miami/Hialeah, Florida;
- Nashville, Tennessee;
- Oahu Island; and
- San Francisco/San Mateo, California.
Most of these exceptionally strong markets are enjoying low supply levels, allowing operators to drive rate. Some markets, such as Nashville, have been buoyed by significant, high-end supply, which is helping to lift the entire market.
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Nashville, with the lowest real rate of the group, is at the greatest premium at 8.7% over its previous high-water mark. San Francisco is just barely over its previous peak, which was achieved in 2000; it can be argued one of the reasons San Francisco recovered so quickly post-2009 was that it had never fully recovered from the decline in the early 2000s.
Like San Francisco, Oahu has seen real rate skyrocket in the last four years, and now stands approximately 2% above its previous peak. On average, these markets posted real rates in 2014 3.6% above their previous peak.
Of the 20 top 25 markets still beneath their previous peaks in terms of real rate, the five least-recovered are:
- Atlanta;
- Dallas;
- Detroit;
- Norfolk/Virginia Beach, Virginia; and
- Phoenix.
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These markets were off their previous peak by an average of 20.4%, as of 2014. Phoenix exhibited two distinct peaks in the late 1990s and mid-2000s and has struggled to move rate to any significant degree since it began recovering in 2010. Atlanta, Dallas and Detroit followed similar (albeit less dramatic swings), while the Norfolk/Virginia Beach area enjoyed its ADR heyday in the late 1980s and has never been able to match those levels in terms of real rate since.
Finally, in terms of volatility, the average U.S. hotel has an annual real rate deviation of 4.9% from its long-term average—so not very volatile at all. However, only two of the top 25 markets had standard deviations at or below the U.S. average: Houston and St. Louis.
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Overall, real rate fluctuations were much more volatile within the top 25 markets than the U.S. as a whole, with a standard deviation average of 7.8%. Those markets at the top of the list of volatility, and certainly many others in the top half of the list, are gateway cities that not only are subject to domestic economic fluctuations but to foreign economic swings as well.
In all, it appears real rate growth still has upside in most markets, with 20 of the top 25 markets still beneath their previous peak levels. Because supply levels still remain low compared to these previous peaks, it is likely many of these markets will set new records in terms of real rate before the next downturn arrives. But it's also clear some of the strongest markets are also the most volatile, and when a downturn does occur, real rate can rapidly plunge.