As the recovery of demand for the U.S. lodging industry takes hold, a detailed look at the data reveals a more mixed result when looking at specific locations. The good news first: Hotels in all location types reported strong demand increases when compared to the first four months of 2010. These vary from 7.2 percent for suburban hotels to 5.2 percent for airport properties—certainly a great showing and an indicator that business and leisure travel have picked up. This plays right into a very slow growing supply environment with little new construction on the horizon.
As of April, STR counted 50,000 rooms in the development pipeline, and the depressed financing environment for new hotels will keep that number low for the next 18 months. This year we registered extremely low (sub 1 percent) supply growth for the majority of location types with the exception of urban locations, where supply grew 1.9 percent. It stands to reason that urban locations were and are always most attractive for development and that the new supply, if at all possible, is targeted at the urban markets. That said, the lack of financing is a reality everywhere so we also expect this supply growth number to decline throughout the year and into 2012.
Given these demand and supply realities, it is no surprise that occupancy changes have been healthy. All location types, with the exception of urban hotels, are showing occupancy growth of at least 4.5 percent. Interestingly, hotels in urban locations reported the lowest occupancy growth (3.6 percent), which is likely a function of the U.S. industry reaching the second stage of the recovery.
Growth rates in urban locations were strong last year and absolute occupancies in those markets have now reached almost 64 percent. That, in turn, points to compression—and possibly even sell-out situations on peak weekday and weekend nights.
The expected growth of average daily rate given this strong demand rebound has started a little slower than we had initially forecasted. ADR growth already reached over 4 percent for urban and resort locations, but still hovered around or below 2 percent for the other location types.
The old rule of thumb of the industry needing an absolute occupancy of higher than 60 percent to reach a point of true pricing power seems to hold, as the two location types with the strongest ADR growth have reached that level of occupancy (urban location: 63.7 percent; resort locations: 62.4 percent). The curious exceptions are hotels near airports, where the occupancy has reached 65.2 percent, the highest of all location types, but where ADR growth is still only 2 percent. It stands to reason that because these hotels accommodate a disproportionate amount of crew and distressed airline business at low pre-negotiated rates, their ability to charge meaningfully higher rates will lag the overall industry. Absolute ADR is not surprisingly highest in urban locations ($137) and resort locations ($143).
As the industry continues its recovery, which is being led by hotels in urban and resort locations, the favorable supply-and-demand fundamentals should allow hotels in all locations to increase ADR for the foreseeable future. It will take some more time until we reach the peak ADR as observed in 2007 because discounts in 2008 and 2009 were steep and prolonged. But overall we are optimistic that the pendulum of pricing power has shifted back toward hoteliers, allowing them to increase occupancies and room rates and ultimately profitability as well.