The negative relationship, or trade-off, between ADR and occupancy is central to revenue manager’s decision under normal operating conditions. In times of growth and prosperity, ADR is raised to increase revenue while lowering occupancies from potentially unsustainable levels.
Conversely, economic downturns often lead to deep discounting in an attempt to inspire additional travelers. The recent severe downturn in the hotel market set off by the social distancing measures and fear of travel subsequent the Covid-19 crisis may represent something of an exception to this usual relationship.
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Although the current crisis is somewhat related to the economic conditions that have evolved through it, the change in hotel performance is much more attributable to non-economic factors. GDP has recovered to pre-pandemic levels, unemployment is nearly recovered, and incomes accelerated as transfer payments and relief measures to prevent job market unwinding were put into place.
At the same time, national US RevPAR is still nearly a third below 2019 levels. The greater part of this RevPAR shortfall is due to dramatically lower occupancy than 2019. Although ADR has also fallen, cuts proportionate to past downturns used to mitigate the occupancy losses have not materialized, and in the most recent quarter ADR has risen significantly above expectations.
The current theory at CBRE is that discounts used in past downturns are not effective in the Covid era as the primary demand detractors are non-economic i.e., fear of travelling and social distancing requirements. A few dollars difference in rate will not convince a traveler that believes their life may be threatened, and attractive rates cannot sway a conference planner if conferences have been canceled. On the other hand, for destinations that can provide a safe environment, no discounts are needed to attract travel-starved guests.
Several observable implications of this theory provide evidence. If demand is returning not in response to rate but rather the capacity to safely accommodate demand, the relationship of ADR to occupancy will not be negative but positive. In addition, ADR should be somewhat stronger than the historical relationship of occupancy and rate given the greatly reduced occupancy but less discounting. Lastly, locations that have been able attract demand from leisure travelers should have stronger ADR recoveries, as these segments are returning more quickly than business.
