A different view of ADR discounting

Industry pundits regularly say hold ADR and do not discount. If we heard nothing else in this recession, we heard that over and over. I have concluded discounting may be the right thing to do in such extraordinary circumstances as we are still in. It may also be something you have no choice doing given the new internet transparency and ease of comparing prices.

As we saw, demand is highly elastic. It appears that down to some level around 53%-55%, occupancy is heavily impacted by price and economic realities. At around 55%, or a little less, there seems to be an equilibrium demand based on essential demand from people who need to travel no matter what the economic situation. When the economy gets bad, occupancy falls substantially and demand dries up.

It is nice to say hold the line on ADR and they will still come. I do not believe that is true, and I now think discounting, and doing so quickly in the teeth of a major recession, may be the right thing to do. Your competitors will do it, so you need to not be the lone holdout or you will be left out of what business there is to get.

I have no statistical proof, but there is anecdotal evidence. There is some portion of demand that has to travel, but as we saw this time, there was a massive cutback by all types of companies on travel budgets. Someone had to really justify why they were traveling and the cost to get permission to do so. I had numerous people tell me they passed on the trip because of budget reasons. It seems to me that a number of trips happened because the rates for the hotel stay as well as the airfare were deeply discounted and employers or individual travelers could justify the cost. Attendees at conferences often made economic decisions last year, and hotel rates and flight costs clearly figured in. The resurgence of travel now is a combination of much-improved business travel, but also individuals, business and families taking advantage of discount deals.

Having been in the real estate business for many years, and having lived through the early ‘90s major recession and others before that, one lesson learned was: take your losses early and get things going again. That was the beauty of the RTC. It is also the essence of “your first loss is your best loss.”

By lowering rates sooner, you can possibly establish yourself with your regular customers as being prepared to meet their needs while maintaining your recession level of occupancy to avoid the competition stealing your guests.

Discounts and reality

The reality is that in a deep economic downturn, one much less terrible than what we just lived through, travelers expect a discount, and if you will not provide it they will go elsewhere. It is just like retailers at Christmas. With the Internet, price comparison is what almost everyone does today, so unless you are willing to go along, you will simply not get occupancy.

I do deals in many real estate sectors—not just hotels—so I see what happened in other product types. The office sector moved very quickly this time to reduce rents through both actual reductions and concessions. Manhattan effective rents declined by 20%, similar to the decline in hotel revenue per available room. Rents in retail and other sectors declined by similar amounts. It suggests that 20% reduction in net revenue, or there about, was what was required generally to get to an equilibrium level where demand was again restored sufficiently to stabilize the reductions in vacancy and price.

By moving fast, office landlords were able to retain some tenants and to get the pain dealt with quickly, so that now vacancy has stabilized and rents have begun to stabilize or rise slightly again. The multi-family owners cut rents and provided a lot of concessions quickly, and they are now experiencing much reduced vacancy and slightly rising rents and lower concessions.

The bottom line is there is no choice but to discount rates in a major recession. It is all a matter of good revenue management and discounting just enough to generate demand. All real estate sectors do it and did it massively in this downturn.

The secret is to out-market the competition and to maintain your asset as one of the best, so that when consumers compare deals they are paying the same or only a little more for your better property than the one down the road, which is of lesser quality. In deep recessions, quality matters, and hotel guests, office tenants and retail tenants all migrate to the better quality asset at a discount price.

Maybe the real point is to maintain or even upgrade your asset as best you can, and that will let you recover faster and to raise rates more when the economy improves.