NASHVILLE, Tennessee — Average daily rates in the U.S. are reaching new heights as the hotel industry recovers from the demand crisis brought on by the COVID-19 pandemic, but is this growth sustainable?
Speaking during a panel titled "Are today's rates sustainable?" at the recent Hotel Data Conference, STR Product Analyst Letizia Rossi-Espagnet said they are for now — until and unless the economy and industry go into another downturn. Rate growth will eventually moderate, she said.
Total U.S. nominal average daily rate has never grown faster and is higher than it's been since 2007, Rossi-Espagnet said. Nominal ADR is currently at about $155 in the U.S. hotel industry.
Why Are Rates So High?
Rossi-Espagnet said there are three factors contributing to rate growth: inflation, leisure demand and volume versus price.
Total U.S. nominal ADR indexed to 2019 shows that in September 2021, ADR rates recovered from the depths of the pandemic, and then continued to rise at a quick pace.
"In June, we're actually at 15% higher than in 2015. But what happens when you take inflation out of the equation? It's a much calmer view. Real ADR is where you take inflation out of the calculation for ADR," she said. "It did in fact recover in September 2021, but it dropped off again, then came back up around April of this year. And it looks like it's stabilizing ... hovering around $100."
She added that once the Consumer Price Index begins to slow down, ADR likely will, too. In 2022, the CPI jumped to 8%, which is the highest it's been since the 1970s. CPI is forecast to drop to about 3% in 2023, then will slow down even further in 2024, she said.
Leisure demand is also a hot topic, as it's been driving ADR and occupancy in major U.S. markets, she said. Pent-up demand and excess savings among Americans have been fueling the leisure boom.
Hotels in all classes — luxury and upper upscale, upscale and upper midscale, and midscale and economy — are booking guests at higher occupancies and rates on the weekends than during the week. For example, in the luxury and upper-upscale classes, the gap between weekday and weekend ADR is $20, and the gap in occupancy is 13%, according to June 2022 year-to-date data from STR.
In comparison to 2019, June 2022 weekend ADR is beating pre-pandemic levels, Rossi-Espagnet said. Weekend accounts for two days in the week.
"All three collapsed classes are above 90% of 2019 levels," she added. "Occupancy [is] struggling a little bit, but weekend is clearly doing better than weekday."
In terms of segmentation, group demand in 2019 made up 32% of the total combined transient and group demand. In 2020 and 2021, that number dropped to about 21%. Then, in 2022, group demand jumped back up to 31% "and it's growing ... we're growing at a much faster rate than in 2019," she said.
"What's even interesting about that is we expected group rebounding would mean more group rooms at a lower rate would bring down rates, but we haven't seen that yet. Maybe the new rates are here to stay," she added.
Rossi-Espagnet said that 70% of luxury hotels had recovered ADR to 2019 levels as of June 2021. That compares to only 18% of the other classes.
Now looking at 2022, almost 91% of luxury hotels have recovered in rate compared to 2019. However, other classes have caught up by this point.
She highlighted Miami as a "poster child" for high rates in the U.S.
"Miami is not representative to all markets in the U.S., but I chose this one because it did so well due to pent-up demand and excess savings driving these new rates, as well as good weather all year round," she said.
The city lost its competitive advantage in 2022 as more destinations opened up travel, but rates still haven't fallen, she said. Miami in 2021 was among a few destinations in the U.S. with minimal COVID-19 restrictions, she said.
Rossi-Espagnet noted that the high luxury hotel rates are not inflating the total U.S. numbers. The luxury segment makes up about 6% of total U.S. supply, she said.
Nominal, Real ADR Total US Forecast
While inflation is still on the rise, Rossi-Espagnet said real rates are stabilizing. Real ADR in 2026 is expected to be much flatter than it was between 2020 and 2021. Nominal ADR is projected to slow down once inflation slows down, too.