27 Feb, 2011
Upmarket U.S. Hotels Worst Hit by Two Big Shocks of Last Decade: Cornell Study
A study released last week by the Center for Hospitality Research at Cornell University concludes that upscale hotels in the U.S. were worst affected by the 9/11 attacks and the 2008 financial crisis, widely considered to be the two most important “external shocks” of the last decade.
Economy and independent hotels in the U.S. were less affected in terms of aggregate occupancy, price (average daily rate), and revenue per available room (RevPAR), says the mammoth study, which analysed data on 34,695 U.S. hotels between 2000-09.
The three professors and executives behind the study, Cathy A. Enz, Renata Kosova and Mark Lomanno, said, “With such a large sample of hotels and rich variation in data over time and markets as in our longitudinal study, first steps have been made to produce a relevant literature that outlines the linkage between external events and hotel performance.”
In the case of the terrorist attacks, the report said, “estimated coefficients reveal that luxury hotels were hardest hit in the first three months post-September 11, followed by upscale hotels. During this period, the monthly drops in occupancy attributable to the 9/11 attacks ranged between 3 and 7.2 percent for luxury, and between 1.6 and 5.5 percent for upscale hotels.
It said economy and independent hotels were less affected, with occupancy drops between 1.4 and 2.6 percent. Midscale hotels experienced only slightly larger drops due to 9/11, between 1.4 and 3.8 percent during the same three-month period. However, by January 2002 only economy hotels continued to show a significant, though tiny (0.7%) drop in occupancy.
In the case of the financial crisis, the report said, “luxury hotels were again hit hardest. While the impact of September 11 eased each month for luxury and upscale hotels, this was not the case after the financial crisis of September 2008. Instead, the situation continued to deteriorate. All hotel segments were hardest hit in the second month (November) after the crisis.
“Four months after the start of the financial crisis, luxury and upscale hotels still continued to experience reduced occupancy, albeit not as bad as in November (2 to 3 percent in January 2009, compared to 5 to 6 percent in November 2008).
“Economy and independent hotels were again the least negatively affected by the financial crisis, and the effect disappeared for independent hotels by January 2009. Economy and midscale hotels even experienced slight rises in occupancy in January 2009.
In terms of room rates, the impact on real prices shows that luxury and upscale hotels were once again most negatively affected by the terrorist attacks, the report said. Unlike occupancy levels, however, the negative impact was greatest for luxury hotels in December 2001 and greatest for upscale hotels in November 2001.
In these months, the attacks contributed to a drop in real ADR on average of $10.60 for luxury hotels and $5.20 for upscale properties. Midscale, economy, and independent hotels saw much smaller effects (up to $1.50), but in percentage terms that can be a substantial percentage reduction in ADR.
“For example, the cost of terrorism on luxury hotels in October 2001 was around $3.00 per room (contributing a 2.4-percent drop in rate), the impact on real ADR in economy hotels was 79 cents (contributing a 2-percent drop in rate), the impact on upscale hotels was $3.38 (contributing a 3.9-percent drop in rate), and the impact on midscale hotels without food and beverage was 83 cents (contributing a 1.3 percent drop in rate).
“By the start of 2002 the negative impact of terrorism remained only for economy hotels, while other segments already experienced improvements in real ADR.”
The report said the financial crisis had a shorter and less negative impact on lodging prices in real terms than did the terrorist attacks. On average, rates were least affected for hotels in the midscale without food and beverage segment. Price drops in luxury hotels (up to $1.80) and upscale hotels (up to $0.80) again represent the worst real price drops among branded hotels attributable to financial crisis.
Independent hotels also experienced similar decline (about $0.90) when the financial crisis was thought to have started in September 2008. However, by January 2009 no hotel segment experienced reductions in real ADR attributable to the financial crisis, although numerous other factors undoubtedly drove down real ADRs.
The results of RevPAR analysis show a similar pattern to those found for occupancy and real ADR, the report said. Though luxury hotels again experienced the worst hit (a drop of $25.00, almost a 30-percent decline), the terrorist attacks had an immediate, large, negative, and significant impact on real RevPAR for all hotels in the industry. That said, the industry rebounded relatively quickly.”
It added, “With RevPAR we again see that the effect of the financial crisis worsened over time. An odd finding with regard to midscale hotels: those without food and beverage were more negatively effected by the financial crisis than were the mid-scale hotels with food & beverage, which is the opposite outcome after the terrorist attacks.
“Overall, higher-end hotels were more susceptible to these events but they also made strong rebounds after four months,” the report said.
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