Business travel

Inflation and business travel demand dampen impact of rising hotel rates

Strong demand from leisure travelers has given hoteliers more pricing power in this economic recovery than they had in previous cycles, but there are some wrinkles to the higher rates, according to Jan Freitag, director national hotel analyst for CoStar Group.

“This recovery is fascinating because of the rebound in room rates,” he said. “Traditionally, room rates recover much more slowly than room demand. In this recovery, however, room rates and room demand recover at about the same rate, and every year [average daily rate] is only $6 less than two years ago.”

He noted that at this rate, nominal ADR is expected to reach 2019 levels by 2023. However, accounting for inflation, ADR will not return to pre-pandemic levels until 2025, did he declare. This means that even if hotels charge 2019 rates, they won’t be high enough to offset the higher costs.

The rate recovery is also expected to slow, according to the latest forecasts from hotel analytics firm CoStar STR and its partner Tourism Economics.

“You can see in the forecast through 2024 that room rate growth is slowing down. This will be a function of business demand and demand from lower-rated groups returning to downtown hotels,” said Freitag.

In other words, the return of business travelers and groups to hotels, necessary for the full recovery of the hospitality industry, is a bit of a double-edged sword in that these customers tend to negotiate and pay lower prices.

“Nevertheless, the US leisure traveler is expected to maintain strong demand, which should continue to provide pricing power to leisure destinations,” Freitag said.

The pricing power that leisure demand has granted hotels is also evident in a comparison of weekend rates versus weekday rates.

The price gap between weekday and weekend fares has increased significantly during the pandemic, Freitag said.

“In 2019, weekend room rates were often slightly higher, especially in [the second and third quarter]. That relationship has completely changed now, and weekend rates are between $5 and $25 higher,” he said.

“The American leisure consumer has been voting with their wallets to travel to upscale resorts and destinations and these have been able to exert pricing power for some time now,” said- he added.

For more on Freitag’s analysis of the latest hotel performance and transaction data, watch the video above.

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