One indicator we watch to judge the health of the industry and the speed of a recovery is the average-daily-rate premium luxury hotels command over upper-upscale hotels.
Traditionally, there is a clear bifurcation between hotels in different scales—partially based on amenities, partially based on service, partially, of course, based on price. This price difference is not static and fluctuates with the macroeconomic conditions. As luxury hotels posted higher occupancies during the mid 2000s, we saw an increase in their rate premium above the upper-upscale hotel ADR. During the downturn, when demand decreased, luxury hotels discounted their rooms, oftentimes at a much faster pace (speaking about dollars, not percentages) than upper-upscale hotels, thereby decreasing the ADR premium.
This column looks at changes in the luxury ADR premium over the last downturn and takes stock of the current situation. We will furthermore examine the premium in some selected markets.
As shown in Chart 1, during the past five years the ADR premium varied between US$95 and US$125. Because we are showing 12-month moving average numbers, the monthly variation was actually much wider, from US$160 in December 2007 to US$78 in July 2009. The important take-away is the luxury rate premium is recovering at a healthy clip and has increased US$15 (or 16%) between the trough of March 2010 (US$94) and November 2011. The annualized November number, however, is still US$19 (15%) below the peak of March 2008.
Because Chart 1 shows only the premium of U.S. hotels, it is therefore probably also enlightening to understand how this premium plays out in selected markets. Let’s examine the luxury rate premium in the following cities: Boston, New York, Chicago, San Francisco and Los Angeles.
As luxury room rates have partially recovered to US$281, up from the trough of US$256, the accompanying ADR premium has increased to US$108, up US$14 from the June 2010 low. In October 2008, the ADR premium was US$134, so Boston luxury hoteliers still have some room to explore further increases in the rate premium. Upper-upscale room rates have climbed US$12 since their lowest point in March 2010, and it is highly likely room rate increases will continue in 2012. But as the trajectory of luxury room rate ADR growth is so far steeper than that of upper-upscale hotels, a further premium increase is also very likely.
Out of our five-city coverage universe, New York is the only market where the luxury ADR premium has recovered to 2008 levels. In November 2011 the premium was US$125, exactly the same as in September 2008. Interestingly, the room rate discounting took its toll and after 19 months the premium bottomed out (at US$93), but exactly 19 months later it has returned back to the prior peak. This rapid acceleration of room rate premiums was fueled by the speed of positive luxury ADR change (+18% over 20 months).
Chicago room rates plummeted for luxury and upper-upscale in the last downturn and have yet to recover meaningfully. Luxury ADR declined by US$60 from early 2008 to mid 2010 and US$29 for upper-upscale hotels during the same time. Luxury room rates are still US$40, and upper-upscale ADRs are US$20 below their peak. Meanwhile, the luxury ADR premium increased US$13 (22%) from the trough on December 2009, and judging by the trajectory of the chart more increases can be expected.
San Francisco luxury and upper-upscale ADR are almost back to prior mid-2008 peak levels. Luxury ADRs have staged a remarkable comeback from the April 2010 low of US$218 and are now US$39 (or 18% higher). For upper-upscale hotels, the ADR percentage change was almost similar at 18% (or US$26). The luxury premium now stands at US$80, which is only US$13 below the peak of December 2008. It is probably fair to assume that as San Francisco continues its comeback, the room rate premium will continue to increase as well.
The most unusual chart in our series is probably Chart 6, which shows data for Los Angeles. The luxury ADR premium stands at only US$12 above the low of US$150 in January 2011 and some US$49 below the peak in September 2008. That said, the US$163 premium is by far the highest of the five cities discussed. Partial reason for this is that the upper-upscale ADR of US$136 is the lowest of the sample. It remains to be seen if the continued upswing in room rates will also affect L.A. upper-upscale ADR positively and if the luxury room rate premium can be sustained.
In summary, the luxury ADR premium varies widely from market to market, and in all cases (except for New York) the most recent premium declines have not been recovered.
New York’s luxury hoteliers have successfully reestablished their old rate premium, but all other markets are still caught in the fallout of discounts that ran rampant during the past few years. As demand continues to grow and occupancies increase, ADR growth is likely going to continue and with it an increase in premium. It will be important to pay attention to the luxury ADR premium as an indicator of the health of specific markets and the industry as a whole.
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