HENDERSONVILLE, Tennessee—It is a truism that new supply affects average daily rate.
It is generally accepted that the new competitor, once they enter the market, will try to build occupancy by stealing demand share from the existing hotels. The easiest way to do this is to open with a room rate below the prevailing market rate to entice guests to try the new property.
The argument goes that once the new property establishes a certain occupancy level, it can then safely increase room rates and keep the demand share, thus having established a new equilibrium in the market. And while this might work in theory, the supporting facts seem more anecdotal than factual.
So when consultants or operations analysts try to establish the impact of new supply in a submarket, they can look at how the submarket has reacted to past supply swings. Often, however, the new supply does not neatly fit a past pattern, so predicting future ADR changes is still guesswork.
Here then is some hard data to quantify the supply impact on ADR over time.
For markets across the U.S., STR, parent company of Hotel News Now, analyzed supply changes and set the year with the strongest supply increase (between 2000 and October 2017) to “year zero.” We then calculated the supply percent change going forward and arranged them in ranges on the x-axis. We then observed the ADR percent change—on the Y-axis—for the markets and submarket over time up to five years in the future. The following pattern emerges:
A few trends stand out:
- Not surprisingly, the impact of the new supply is more pronounced the more rooms get added to the market or submarket.
- The negative ADR change is more muted when supply growth is in the flat to 3% range.
- The negative ADR impact is most pronounced two years after the supply opened, but only if it grew by over 3%.
- Four years after the opening, the impact has virtually dissipated, and the markets were able to increase ADR, no matter how strong the supply impact.
Obviously, the other truism holds as well: “Your mileage may vary.” But the data seems to bear out that sharp supply increases indeed have a negative impact on ADR.
Special thanks to Claudia Alvarado and the STR Consulting and Analytics team for running the numbers.
This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.