Affordable Hotel Rooms Get More Expensive

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Spend Matters welcomes this guest post from H. Cole Hassay, economist, pricing and purchasing, at IHS Markit.

The hotel industry experienced healthy demand this past summer. With this strong demand, hotels with the least amenities increased the most in price, as limited-service hotels became more expensive in the United States. While the typical surge in demand from summer travel was partially responsible for a normal seasonal upturn, there were other factors at play, too. Low gasoline prices led to unprecedented travel by Americans, fueling higher demand for the hotel industry. Additionally, limited-service hotel rooms declined in number this year, further tightening prices. We expect that as more limited-service hotels are constructed, prices will be better able to handle the growth in demand.

Americans traveled more than they have at any other time in the past ten years this summer, continuing the two-year trend of increasing travel because of lower oil prices. Greater travel fueled demand for hotel rooms, leading to price hikes. When coupled with the typical seasonal price surge for hotels, this increased travel led to record-high prices. Limited-service hotel prices rose at a drastic rate, far outpacing those of the entire industry. From July to August, the producer price index (PPI) for the hotel industry in aggregate increased by 14.4%, while it went up 24.4% for limited-service hotels.

There is no evidence indicating travelers are shifting their preferences to limited-service hotels. Rather, limited-service hotels did not have adequate supply to deal with stronger travel demand. From August 2015 to August 2016, existing supply for limited-service hotels saw a slight decline. Furthermore, as hotel companies increased construction in response to stronger room rates, limited-service hotels were ignored. Due to a constrained supply, prices for limited-service hotels hit abnormally high levels.

In response to the restricted supply, hotel companies have made plans to build more limited-service hotels in the near future — nearly 9,000 new rooms in the category are currently under contract according to Smith Travel Research. This represents the largest year-to-date increase in construction contracts among the six different classes of hotel rooms. This supply increase will allow limited service hotels to avoid abnormal price spikes in the future. Additionally, demand for limited-service hotels will begin to diminish as travel decreases with the end of summer and gasoline prices rebound. Hence, while a combination of factors were responsible for the record-high prices for limited-service hotels, it appears this price surge will be short-lived.

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