Will Average Daily Rates Drive Hotel Industry Growth in 2017?
ADR (average daily rate) measures the average room price paid in the market. In 2016, the ADR rose 3.1% year-over-year (or YoY) to $123.97, slower than the 4.4% rise it recorded in 2015.
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Inflation rate affects ADR, which in turn affects the operating income of the hotel sector. Moody’s Analytics estimates that the inflation rate in 2016 will be ~2.6%, a rise of 1.9 percentage points compared to 2015, driven by the recovery in oil and commodity prices.
Hotels can easily adjust their pricing depending on inflation, so the nominal growth in the ADR will also grow with inflation, when in fact, real growth in the ADR will be less.
As discussed in the previous article, hotel occupancy is expected to fall slightly in both 2017 and 2018. For 2017 and 2018, ADR growth, if any, will be the sole driver of revenue growth.
STR estimates that the nominal ADR will rise 2.8% YoY in 2017 to $127.34. Though this rise will be lower than 2016’s rise, it will still be impressive. As a result, hotel revenue per available room (or RevPAR) is expected to rise 2.5% YoY to $83.2, lower than the average 3.3% YoY growth rate in RevPAR clocked by the hotel industry in the past 30 years. In the past six years, hotels have managed to grow their RevPAR by more than 3%.
For 2018, the ADR is expected to rise 2.8 YoY to $130.95, resulting in a RevPAR rise of 2.6% to $85.36.
Investors can gain exposure to hotel stocks by investing in the Consumer Discretionary Select Sector SPDR ETF (XLY), which holds 0.63% in Marriott International (MAR) and 0.38% in Wyndham Worldwide (WYN). Other major hotel stocks include Hilton Worldwide (HLT) and Hyatt Hotels (H). Next, we’ll discuss US hotels’ construction pipeline.