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Hotels Are Upping Their Room Rates, But Is It Enough To Offset Higher Costs?

In the week leading up to Christmas, hotel data tracker STR released some head-scratching figures: average room rates saw increases despite a drop in hotel occupancy. 

Experts note that dynamic is a result of rising costs — which have prevented operators from significantly dropping rates to lure travelers — and a steadfast optimism that the leisure market would rebound beyond pre-pandemic levels.

By the end of the year, that latter forecast showed signs of momentum, as rates and occupancy saw double-digit percentage increases over 2019 levels, resulting in a jump in revenue per available room. 


ADR has risen more rapidly than we expected — in some cases, that rise was due to strong demand confronting capacity constraints, which enabled solid revenue management, while in other cases, the rise was more influenced by inflation," STR President Amanda Hite said in a statement

Late in the year, occupancies slipped nationwide to as low as 44.3%, while average daily rates were up and revenue per available room, or RevPAR, was down, according to STR data, hinting that hotels were charging higher rates but making less revenue for their trouble. 

The most recent weekly STR report on hotel metrics flipped that picture. During the last week of 2021, all three hotel metrics were well above their positions during the same week of 2019: occupancy was up 10.7%, average daily rates climbed 15.1% and RevPAR jumped 27.4%. 

Room rate increases were largely driven by luxury resorts, led by properties in Miami, with $455.31 ADR; and Oahu, with average rates of $411.47, STR reports, pointing to the ongoing strength of leisure travel.

"Most of the increases are still due to demand recovery from the pandemic, especially in the leisure segment," CBRE Senior Hotel Economist Bram Gallagher said. "Leisure demand has demonstrated more resilience to variants than group or business demand, with delta not stopping the surge in leisure travel in late summer and fall."

In a typical downturn, ADR growth lags occupancy during the recovery period, but that has yet to be the case as of late.

“Recovery is not playing out the same across the marketplace, and ... the cost of labor is adding pressure on the bottom line, which is a contributing factor to many hotels driving rate," Hite said. 

Strong demand for luxury properties is also somewhat skewing top-line data for hotels, as some hotels are able to drive up rates while enjoying stronger occupancy. 

Warmer tourism markets outperformed in 2021 and are expected to continue to do so in 2022, Gallagher said.

“I don’t think there’s a disconnect between ADR and occupancies,” Pebblebrook Hotel Trust CEO Jon Bortz said. “At our resorts and leisure-oriented properties, we’re seeing a strong desire on the part of the customers to treat themselves to larger rooms or suites, view rooms, waterside, and so on, because they have the financial resources now and have been cooped up for so long.”

Industrywide, demand heavily favors domestic travel. Drive-to resorts are seeing the benefit, experiencing historically high levels of demand and creating an environment that allows for higher pricing within that segment, Bortz said.

Despite the omicron variant — which, though highly transmissible, so far has proven to be a more mild disease — leisure travel demand will continue to sustain room rate increases this year, according to CBRE’s Gallagher. 

"We expect ADR increases to continue in 2022, a bit better than 8% year-over-year," Gallagher said.

Demand will be facilitated by higher household savings and fewer constraints on room availability, as most hotels temporarily shuttered by the pandemic have reopened, according to CBRE Hotels Research’s December 2021 edition of Hotel Horizons. If inbound international travel resumes in any meaningful way this year, that will help gateway markets ramp up occupancy as well.

This year, existing hotels will also benefit from below-average new construction deliveries, the report predicts.


The harder-hit business travel segment might also see gains in 2022, Gallagher said.

"We do expect some recovery in the other segments as well," Gallagher said. "Smaller business travel and some additional group travel in lower cost-of-living markets should return first.”

In a sign of this recovery, Marriott International U.S. group bookings beat 2019 levels in the five months ending in October, as event booking windows shortened during the pandemic, Marriott CEO Anthony Capuano said in November during the company’s most recent earnings call

“Most importantly, Group ADRs continue to rise and for full-year 2022 is currently pacing nearly 4% above pre-pandemic levels,” Capuano said.

The outlook for business travel is still uncertain. Besides the omicron variant, there is the possibility that business travel has been impacted permanently by the pandemic, Atlas Hospitality Group President Alan Reay said.

“We've seen a complete shift on how people do business, with Zoom calls and everything else,” Reay said. "I’ve talked to a lot of people in other businesses who have told me that despite the fact that they didn't travel, their revenues are either the same or better, and that might discourage further travel."

In addition to signs of returning demand, room rate increases are driven in part by the significant financial stresses the industry still faces. 

"Although Covid has overshadowed other economic factors in the lodging market, some of the rate increases in 2022 may be attributable to higher input prices, particularly in labor," Gallagher said. 

Small business and franchise hotel owners are especially struggling to "meet debt obligations and find employees," an American Hotel & Lodging Association spokesperson told Bisnow by email.

"Over the last two years, hotels across the country lost more than $110 billion in room revenue alone, and many have been operating well below the break-even point, relying on reserves to cover expenses," the spokesperson said.

Labor will continue to be a problem in 2022, hotel experts say. At least 1 million hospitality workers quit their jobs in November 2021, according to the Bureau of Labor Statistics.

Low pay is a factor. Among the industries tracked by the BLS, leisure and hospitality ranks at the bottom with an average hourly rate of $19.20 as of November 2021. Though that figure represents a sizable gain from just before the pandemic, when the average was $16.90 an hour, leisure and hospitality still falls behind the next-lowest sector, retail, where wages average $22.08 an hour.

"All our hotel clients are saying this is really a big problem that they have to deal with — not only finding employees, but retaining them," Reay said. "We've never [seen] such a turnover of employees. They may be working at one hotel when another hotel says here's the money, and off they go."

Other inflationary pressures on hotels include higher costs for food and beverages and increasing energy costs.

The question now is whether hotels will be able to raise rates enough to maintain the profitability they clawed their way back to in 2021, despite higher labor costs, as leisure travelers returned.