Should We be Concerned About ADR?
Of Canaries and Coal Mines
By Trevor Stuart-Hill President & Founder, Revenue Matters | December 2016
Projections for 2017 and beyond by STR, CBRE and PKF all call for anemic occupancy growth at best, notwithstanding record occupancy levels for the U.S. hospitality industry. With Revenue Per Available Room (RevPAR) growth projections at inflationary levels (2.5 – 3.5 percent, or so), it is clear that expectations call for Average Daily Rate (ADR) growth to continue, but will it?
Coal miners used canaries to warn them of lethal gasses they couldn't smell, see or taste. And, while we can't rely on canaries to help us stay out of trouble as hospitality operators, we may be able to rely on history. It is oft-quoted tenet that history is the best teacher and, if that is true, then we'd be well served to reflect on what we can learn from our past.
Sector Resilience - The hospitality sector as a whole is resilient. It employs lots of smart, dedicated and hard-working individuals. However, it is not immune to external shocks-and recovery can take considerable time. Renata Kosova and Cathy Enz published an excellent article (Cornell Hospitality Quarterly – September 2012 ) that examined the impact and industry response to two major external shocks from the previous decade (the terrorist attacks of September 11, 2001 and the financial crisis of September 2008). Their study concluded that hotel management didn't fall into disarray, but successfully addressed the effects of these events as evidenced by hotels' eventual recovery.
Cyclical Demand - If the past several decades are any indication, it is clear that demand in the hospitality industry is cyclical. As such, it has required hospitality executives to adapt to ever-changing conditions.
While factors that contribute to demand (or lack there of) for a specific property or market are vast, we can point to some common measures that serve as indicators for overall health of the hospitality industry-absent any readily identifiable external shocks. Gross Domestic Product (GDP) movement historically has had the strongest correlation to changes in RevPAR. The challenge is that GDP movement is a coincident indicator and not a leading indicator, so this puts a premium on the need for operators to make appropriate decisions in real-time. Employment levels and personal income (both contributing to overall consumer confidence), plus corporate profits are admittedly lagging indicators, but are useful in providing some degree of guidance as to what GDP performance may look like in the months ahead.