Luxury resort hotels in the United States were a clear beneficiary when Americans resumed traveling in 2021. Room rate growth on the high end soared, as travelers chose to splurge and enjoy pent-up vacation days and ability to work from anywhere by heading to luxury locations. Domestic resorts also benefited from the lack of access to overseas resorts, as borders were closed or required onerous traveler testing requirements.
But the period of double-digit rate growth appears to be over. In March, the monthly average daily rate, or ADR, for luxury resort rooms fell for the first time since February 2021. The decline in March compared to March 2022 was only 0.7% but comes on the heels of a run-up that saw ADR increase from $182 in April of 2020 to $492 in March of this year. On industry conference panels and in interviews, operators had been wondering if the high rates were sustainable; recent ADR trends seem to indicate that rates are softening.
The reasons for this change probably include that American travelers are again freer to go abroad. In addition, with a recession in the forecast, however mild it might be, American travelers may have become more cautious over discretionary spending given the uncertain economic situation and widespread layoffs reported in the daily news. Airfares have also increased sharply, so that travelers may pick their transportation options first before choosing an accommodation that still fits within their budget. Vacationers will still get away this summer or take long weekend trips, but they might be more interested in deals or lower room categories to keep costs manageable.
As room rates for leisure destinations reached record highs in 2021, the ADR growth for luxury hotels in urban locations was under much more pressure. The comparison of growth rates in April 2021 is telling. In April 2020, ADRs in luxury resorts dropped 42% compared to the prior year, then rebounded in April 2021 year over year by 102%. For urban luxury hotels, their April 2020 ADR decline was a similar 45%, but the rebound in the following year was only 46%, roughly half the growth rates for resorts.
Fewer business travelers and less activity in downtown areas had a negative impact on demand and hence on operators’ pricing power. As corporate travel continued its recovery through 2022, room rate growth in urban locations peaked much later than for resort hotels. In March of this year, rate growth was 6.2%, compared to the negative 0.7% for resorts.
The percent changes in ADR only tell part of the story. First-quarter ADR for luxury resorts was $475 and $332 in urban locations. This shows a clear bifurcation in customer spending behavior and points to the different occupancy environments that influence operators’ yield management decisions. Because of the headwinds to urban hotels, their average occupancy was only 60.1% in the first quarter of this year. For resorts, in the same period, average occupancy was a much stronger 67.6%.
Looking ahead, it is likely that luxury resort ADR growth will remain muted or even decline in certain markets that have posted sharp increases over the last few years. Urban high-end hotels are expected to continue seeing demand increase, which in turn should allow for rate growth, however small, this year.