Chicago hotel room rates up, even though occupancies are down

Belinda Arcitec

This surprising aspect of the comeback for COVID-battered hotel owners signals a dramatically different recovery path than the industry’s trajectory after the Great Recession, when occupancy in Chicago took three years to return to normal and room rates took six, according to STR.

Hotel owners and managers point to a mix of factors making hotel rooms among the many things costing consumers more in 2022. Part of the reason may be that business travelers and those tied to the meetings industry—which often get discounted rates that would weigh down the market average—haven’t come back in a big way yet.

But it’s also a sign that bottom-line math is changing for some local hoteliers. Soaring costs of goods, higher wages and rising property taxes are so inflating hotel owners’ expenses that selling fewer rooms at higher rates is a better strategy for some than offering steep discounts to try to boost occupancy. Staffing shortages also continue to plague hotel managers, making it harder to provide the level of service guests expect.

None of that is good news for price-sensitive travelers, but the high-rate trend could help speed up the financial healing for hotel owners trying to salvage their properties more than two years into the public health crisis.

“The classic math in hotels has been: Lower the rate, stimulate occupancy, then (revenue) grows,” says Bob Habeeb, CEO of Chicago-based Maverick Hotels & Restaurants. “Now people are struggling with labor and higher costs, so if they’re going to achieve their revenue (goals), they’re going to get it via rate.”

Chicago’s numbers are in line with a higher room rate trend nationwide. Average rates in March among hotels in the 25 largest markets tracked by STR were 6% higher than they were during the same period in 2019, while occupancy trailed by 11%.

Though the numbers may seem to defy principles of supply and demand, experts say the pandemic has reshaped hotel economics.

Hoteliers have historically dropped rates following major crises to induce demand, but the pandemic has proven far different from economic downturns because safety—not price—was keeping bookings down, says Jan Freitag, national director of hospitality analytics for CoStar Group, which owns STR. Now that COVID restrictions are subsiding, hotel owners are enjoying an onslaught of demand from leisure travelers willing to pay high rates.

STR data shows tourists, not business travelers, leading the way: Downtown hotels were 66% occupied on average during weekends in March with demand funneling into Friday and Saturday nights, while they were just 48% full on weekdays. The rates remained relatively high throughout, with weekends generating an average of $176.91 per room and weekdays averaging $172.21, according to STR.

“The (rate) declines were actually not as severe as they could have been, and room rates are coming back a little more quickly,” Freitag says.

Hotel owners also know that dropping rates can trigger a race to the bottom among competitors, which historically prolongs their pain because it’s difficult to bring rates back up.

The pool of available rooms is also not as deep as the numbers suggest because many hotels are struggling to find housekeepers and other staff to clean and prepare them. The share of “vacant dirty” rooms at hotels nationwide—those that are not available to be sold because they haven’t been cleaned—was between 6% and 8% several nights per week in January, up from a 4.4% pre-COVID average, according to data from Hotel Effectiveness, an Atlanta-based company that provides an online labor management platform used by thousands of hotels.

When hotels can find staff, they’re paying more: Hotel Effectiveness data shows average wages for hotel front desk workers in Chicago, for example, were 16% higher at the end of March than they were a year before. Wages for room attendants and laundry staff were each up 10%.

https://www.chicagobusiness.com/commercial-real-estate/chicago-hotel-rates-rise-despite-low-room-occupancy

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