314 | No Discounts Available: Smart rate management keeps hotels afloat amid COVID-19 storm

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SKEWED OUTCOMES: Many of the hotel rooms that have gone offline because of the coronavirus pandemic are in big-box hotels. For that reason, industry experts say measurements of average daily rate across the industry are skewed and, for the most part, hotels that remain open are managing to hold rate despite low occupancy during the COVID-19 crisis.

Industry watchers say decline in ADR is product of low occupancy, not weak business strategy

Despite the steep drop in business in the U.S. hotel industry over the past year, one key performance metric that seems to have held its own, relatively speaking, is room rate.

While average daily rate or ADR has plunged along with occupancy and overall revenue, the cause of the decline is different than in other economic downturns. The drop in rate has more to do with low occupancy and who is staying at hotels rather than hotel operators discounting to entice bookings, which is what they tried in previous economic crises.

In a global pandemic, when fear and government mandates restrict travel, cheap rates will not attract more business, experts say.

TRIPBAM tracks the corporate hotel market and helps businesses find the best rates for their travel programs.

DOWNWARD TREND: TRIPBAM, a tech company that tracks hotel rates for corporate travel buyers, charts the decline in market and booking rates in its 2021 Quarterly Market Report. Steve Reynolds, founder and CEO, believes corporate rates will drop even further in the second quarter of this year.

The tech company recently released a 2021 first-quarter report that reveals shifts in corporate travel in the U.S. amid the coronavirus pandemic.

Compared to January 2020, average market rate in January 2021 was down 41 percent, dropping from an average of $205 a night to $120.

At the same time, corporations’ average booking rate dropped from $175 to $116, a 33.7 percent decline.

Steve Reynolds, founder and CEO of TRIPBAM, which tracks hotel rates for about 2,000 corporate travel buyers, said hotel pricing in his niche has yet to hit bottom.

“I think they’ve got another 3 or 4 percent to go,” he said. “Where our rate was about $189 on average, we’re now running probably $109, and it just keeps kind of trickling down.”

Part of the reason for the decrease, Reynolds said, is the change in business travel trends. He listed several:

  • Road warriors who typically stayed at upscale hotels have shifted to lowered-tiered properties. Reynolds expects the trend to continue during and immediate post-pandemic.
  • Most business travel these days is “essential travelers” seeking lower-cost stays. Hotels are offering fewer discounts to business travel buyers. TRIPBAM’s quarterly report notes in January 2020 discounts averaged 25 percent compared to 16 percent this past January.
  • Business travelers are staying longer. On average, about one day extra than pre-pandemic, which boosts RevPAR a bit.
  • Business bookings are being made closer to check-in.

ZERO DISCOUNTS: The U.S. hotel industry has seen rates decline over the past 12 months, but the numbers may not be telling the whole story. Industry rate watchers as well as asset managers say, for the most part, hotel owners and operators are being smart about pricing while other pandemic-related factors are skewing rate metrics. Episode 314 of Lodging Leaders podcast explores what is truly impacting hotel pricing during the coronavirus crisis.

Hotels are also in a bit of price war.

“We also track by brand and by chain, so we can kind of see the pricing strategies by these different entities,” Reynolds said.  “You’ll see one month that a particular chain will kind of pop up as far as rates, but their volume starts to drop. Then they lower their rate and the other guy starts to pop up. So there’s this kind of a see-saw effect that’s occurring between the major brands and chains right now. But I think most of it is just this down market. It’s the Courtyard by Marriott. It’s the Holiday Inn Express winning the day versus the big box hotels.”

Reynolds said the increased length of stay is driven by corporations becoming more mindful about environmental health as well as how to best economize on essential travel.

Extended-stay hotels have long been the choice of long-term business travelers such as health-care professionals and construction workers. But the sector gained new favor by transient travelers during the pandemic.

The Highland Group recently reported that while the extended-sector lost about a third of its room revenue in 2020, it was not as great a loss when compared to the nearly 50 percent decline in revenue in transient hotels.

Mark Skinner, partner at The Highland Group, said extended-stay is expected to return to 2019 business levels before its transient cousins.

To highlight the positive outlook of the sector, Extended Stay America, an economy brand, on March 15 announced it agreed to a $6 billion sale to Blackstone Group and Starwood Capital Group.

Meantime, other lodging sectors continue to struggle.

LUXURY LEVEL: Hotels in the luxury, upper-upscale and upscale chain scales make up less than a third of the 1,760 hotels closed in the U.S. as a result of the coronavirus pandemic, but account for highest percentage of rooms offline, Kalibri Labs reported this month. Maxine Taylor, a hotel asset manager with CHMWarnick, says the closing of big-box hotels has skewed business performance metrics across the industry, including average daily rate or ADR.

Kalibri Labs this month reported more than 1,760 hotels or nearly 5 percent of hotel rooms in the U.S. have closed since March 30, 2020.

When broken down by chain scale, luxury has the fewest hotels closed but the greatest number of rooms at 15.6 percent of all rooms off line. That’s followed by upper-upscale which has more than 9 percent of total rooms closed and upscale with 5 percent.

It’s safe to say that most of the big box hotels are found in these segments, and they’ve fared the worst as the COVID-19 pandemic has seen conventions and large meetings come to a full stop.

Maxine Taylor is with CHMWarnick, a hotel asset manager. She lives in California, which has experienced the longest and most-restrictive anti-virus measures in the country.

Taylor has a 25-year tenure in the hospitality industry, four of those with CHMWarnick, and she is watching the undulations in hotel-business performance amid the COVID storm.

“We have 70 hotels and we are largely focused on the big box hotels, which will skew the numbers in terms of what you’re seeing on a nationwide basis,” Taylor said. “But I think there’s a couple of interesting nuances to looking at ADR.”

Hotel performance varies market to market and hotel to hotel. Government restrictions on travel and business openings vary from state to state and county to county, and can change every week. It’s a difficult task to vet nationwide hotel business performance to identify any real trends, Taylor said.

Because a significant number of full-service, big-box hotels were closed throughout 2020, STR’s analysis of key performance metrics, including ADR, did not take these properties into account. As such, Taylor thinks hotels did not lower rate as much as STR and other analysts are reporting.

STR reports on industry averages and its recent update on 2020 performance revealed average daily rate was $103, a decline of 21 percent from the year before and the lowest since 2011 in the trough of the Great Recession.

Year-over-year declines were the worst on record across the three key performance metrics. Average occupancy was 44 percent, a 33 percent decrease. And RevPAR averaged $45, a 48 percent plunge.

STR OUT LOOK: Jan Freitag, national director of hospitality analytics at CoStar Group, gives a forecast for hotel performance in 2021 and in 2022. He expects RevPAR to begin to recover in April and pricing power to return in 2022.

“There’s a bit of an organic kind of decline happening here,” Taylor said. “If you simply take out your higher-rated demand segments without changing your transient rates at all the result is that you’re going to have a lower ADR, right? It’s just the organic growth. You didn’t necessarily change your rates at all.

“I’m not saying people didn’t change their rates. I do think that there was some discounting, but I do think that we’ve been a lot more disciplined this time around in terms of not discounting.’

CHMWarnick asset manages a full-service luxury hotel in San Francisco which is among 11 hotels in its competitive set. Five of the hotels are closed, Taylor said. “To try and glean information from that is really distorting.”

In late February, Taylor looked at the performance of the hotels in the comp set over the previous 28 days. It showed an average 7.3 percent occupancy. But if the five that were offline were added to the mix, the average-occupancy metric would have been halved. “The market is really running closer to 3 or 4 percent, but it’s showing 7 percent because half the hotels are temporarily suspended.”

Though many hotels in destination markets and even suburban markets are offering staycations or work-from-hotel packages with special pricing, Taylor sees those programs as stop-gap measures to generate revenue rather than a move to reduce overall rate.

She also takes into account the impact brand loyalty schemes have on ADR. Brands redeem to hotels the value of the points used by guests. The higher the occupancy, the greater the redemption rate. “Right now we’re at such low occupancy levels that our rates coming back and redemptions are so low, so low, that’s kind of organically or unnaturally skewing our ADRs.”

In previous downturns, hoteliers got caught up in discounting as hotels competed for business. But the current recession is not caused by economic forces; it’s a public health crisis and no amount of price cutting can convince people to travel when fear of catching COVID-19 or government travel restrictions keep them away.

“We absolutely normally see a race to the bottom. I’m not necessarily seeing that right now,” Taylor said.  “As a whole, the industry has been pretty disciplined this time around in terms of the rates.”

After a year of weathering COVID-19’s assault on the hotel businesses, Taylor hopes the industry will emerge post-pandemic without having had to dramatically reduce rates. Her fingers remain crossed. “You never know. Somebody in your comp set starts doing it and you still need to get your piece of the pie and have to start playing in the game sometimes. But in this current pandemic-induced economic crisis, it’s not necessarily like the ones of the past or in 2008.”

With national economists predicting GDP growth of 5 percent this year and next, Taylor expects hotel business performance to remain low for now. But once vaccines are widely administered, she anticipates an unleashing of pent-up travel demand.

YEAR OVER YEAR: HotStats tracks hotels’ profit-and-loss trends. Its most recent analysis of U.S. hotels shows declines in GOPAR or gross operating profit per available room and TREVPAR or total revenue per available room from January 2020 to January 2021. David Eisen, director of intelligence for the Americas at HotStats, says the strongest driver of RevPAR is room rate. (Source: HotStats)

For hoteliers wondering when rates will get on a growth trajectory, HotStats, a global benchmarking company with headquarters in London, offers some guidance based on history.

David Eisen is HotStats’ director of hotel intelligence for the Americas. Though the company began to carve a business niche in the U.S. a few years ago, it’s been tracking hospitality profit-and-loss metrics in other countries for more than 10 years.

For the hotel industry, the pandemic recession is worse than the downturns of 9-11 and the Great Recession combined, Eisen said.

“It’s good to look back on past crises to see kind of what the fundamentals were back then and what the recovery and rebounds looked like.”

With regard to the history of hotel rate recovery, HotStats has years of data on the U.K., and in particular London.

Although the terrorist attacks of 9-11 occurred in the U.S., their impact reverberated around the world. In September 2001, average room rate in London was £97.30. ADR did not return to that level until October 2003, Eisen said.

In regions outside of London, ADR was £68.50 in September 2001. It remained flat over the next year and rebounded to the 2001 level in 2003.

At the start of the Great Recession in 2008, room rate in London averaged £97.44. In 2011, it was £99.72.

“Basically, what we’re seeing is it takes about three years to get rates back to pre-crisis levels,” Eisen said.

When it comes to regaining total revenue, hotels in London and the rest of the U.K. took more than three years to return to pre-crisis revenue performance. Overall, Eisen said, it took U.K. hotels more than six years to return to profitability.

“From a profitability standpoint, it takes about 1.5 times longer than revenue to recover,” he said. “The biggest predictor of RevPAR success is never occupancy. It’s always rate.”

Mike Chuma is vice president of global marketing at IDeaS, a software provider that uses artificial intelligence to manage hotel revenue, including setting rates for its 15,000 clients.

Though its pricing programs are automatic, general managers and their teams maintain control over such business decisions. That’s important to note because, across the board, IDeaS has not seen room rates significantly decrease over the past year.

“Traditionally, we haven’t seen rate drop as fast as it has in the past,” Chuma said. “What it means is our revenue managers and the hoteliers themselves understand that this is a dynamic that they’ve not seen before. That no matter how far their rate drops, where their rate erodes, it’s not going to stimulate demand.”

IDeaS is advising its clients that by holding rate, they maintain the value of the property and its brand. “Protecting your brand and your rate integrity is more important now than ever,” Chuma said.

In a few cases, the pricing behavior of competing hotels may force a hotelier to discount rates, but Chuma said it’s important to know why you want to follow suit.

“Don’t just drop rate because you think you’re going to stimulate demand. Your demand is not a function of that price elasticity too much anymore. It’s a function of things that may be outside of your control.”

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