Small Inn and Bed and Breakfast Industry Articles

18 September 2008
Charles Snyder

Things have changed in the U.S. hotel industry since 2007. Coming off of several years of strong growth, economic and cyclical factors have combined to slow hotel industry performance. It’s hard to find a consensus opinion as to whether first half 2008 performance was respectable or poor, unexpected or predictable. What is clear is that there are several factors putting downward pressure on occupancy. The tight economy and increased costs of transportation have softened demand. This and added pressure from a spike in newly constructed hotels have caused occupancies to decrease in 2008. Revenue performance is not, of course, only a function of occupancy. Hotel room rates are the other variable in the equation. In a period of decreased occupancy, what hotel managers and owners choose to do with their rates will determine the performance of the industry.

Are hotel rates still rising?

In a tight economy, the consumer is prone to look for a bargain. It’s clear they are not finding them in the airline sector. A special analysis of STR data has been compiled to determine to what extent single hotels increased or decreased their rates in the first half of 2008.



In the first half of 2008 U.S. hotels increased average daily rate by 4.2% nationally. This offset a 2.6-percent decline in occupancy and revenue per available room increased slightly by 1.5 percent. The average daily rate for a U.S. hotel during the period was $107.64. The U.S. average tells us that, as a whole, rates went up.

While each hotel market has its own unique competitive environment, STR found positive rate growth in many locations. All of STR’s top 25 markets have experienced an increase in rates through the first half, and only seven have experienced declines in RevPAR due to decreased occupancy.

On a macro level, it is clear that the industry and its markets are collectively raising, not discounting rates. Industry theory suggests that maintaining or increasing rates in the face of occupancy declines is a preferred strategy.

Are some hotels discounting?

How is the pressure of decreased occupancy affecting the hotelier? Looking at the average, it is difficult to determine if the numbers are supported by a few strong markets or if the trend is broad-based. A deeper analysis shows that more hotels are decreasing their rates this year, but the majority continues to raise rates.



STR studied rate changes of 23096 hotel properties* between the first half of 2006 and 2007 and 2007 and 2008. The amount of hotels discounting their rates grew by 49.4% or 2238 hotels between the two periods. The amount of hotels increasing rates fell by 12.1% or 2,249 hotels. This represents a swing of nearly 5,000 hotels or 19.4% percent of the survey. More hotels are decreasing their rates this year but not enough to push the national and local averages to the negative.

Raising rates continues to be the prevailing trend. This year, 16,306 hotels (70.6% of the survey) increased their rates and only 6,766 discounted.

How much are hotels increasing/decreasing their rates?

The size of the rate increase or decrease is also important. The amount of hotels discounting their rates by more than 5% has grown by 34.7% or 550 hotels. Conversely, the amount of hotels raising their rates more than 5% has dropped 26.7% or 3,096 hotels between 07-08 and 06-07.



As in the previous period, the largest grouping of hotels currently includes those that increased their rates more than five percent, followed by those which increased 2.51 – 5.0 percent. Just over one third of hotels in the study increased rates by more than 5.0 percent. The largest change, however, occurred on the negative side. Over 1,000 hotels were added to the ‘Decreased 0.1% to 2.5%” category. Almost half of all discounters fall into this grouping.

It is surely possible that every market will have hotels that are decreasing rates even while their competition raises them. Discounting may serve a competitive function between neighboring hotels competing for finite demand, but often at the risk of eroding RevPAR for the neighbor as well as the discounter.

In reality, behind the aggregated figures of a market or segment, hotels vary greatly in their response to a changing competitive environment. In 07-08 the largest rate increases at a property were above 150 percent, while the largest discounts approached 50 percent.

How a hotel performs is still largely dependent on the market and the competitive factors among hotels. Even in tight times, hotels are not gas stations. They provide differentiated service and amenities and it will be these factors in addition to rate strategy that determine their success.