Have you ever wondered if there is a relationship between the average daily rate (ADR) achieved by a hotel market and the cost of living (COL) in that market? Based on our detailed econometric models, we know that real ADR (inflation adjusted) in any quarter, is a function of past real room rates and contemporaneous occupancy levels. It is also a function of dummy variables representing such data as quarters, one-off events such as the Olympic Games & 9/11 and sometimes consumer confidence as illustrated in the equation in the footnote.
While the equation provides an estimate of the likely future value of ADR, it does not provide an estimate of the absolute value of ADR in any one year. To what extent is the ADR in a Top 25 hotel market in the US related to the COL in the same market? Is there a relationship between the COL and the ADR achieved in 2018 in the Top 25 hotel markets and if there is a relationship, how strong is it?
To find the answers, we used two sources of information, STR’s Monthly Hotel Review for the year-ending December 2018 and the Council for Community and Economic Research‘s C2ER Cost of Living Index.
According to STR, year-end ADRs for the Top 25 hotel markets ranged from a low of $103.17 for Norfolk/Virginia Beach, VA to a high of $262.31 for New York, NY. This compares with an average of $157.94 for the Top 25 markets, an average of $114.19 for all other markets and an average of $129.83 for the entire US.
The C2ER Cost of Living Index is the most reliable source of city-to-city comparisons of key consumer costs available anywhere. C2ER COLI data are recognized by the U.S. Census Bureau, US Bureau of Labor Statistics, CNN Money, and the President’s Council of Economic Advisors.
The C2ER Cost of Living Index consists of six major categories: grocery items, housing, utilities, transportation, health care, and miscellaneous goods and services. These major categories in turn are composed of subcategories, each of which is represented by one or more items in the Index. Separate component indexes are published for each of the six major categories
Based on our scatterplot below, we found a very strong relationship between the 2018 ADR and the COL Index for the Top 25 US hotel markets. We found that R-squared is equal to 0.80 which tells us that 80% of the variation in the ADR across the Top 25 hotel markets is explained by the variation in the COL in these cities. The remaining 20% is unexplained.
Strong Positive Linear Relationship Between the Cost of Living and Average Daily Rate for the Top 25 US Hotel Markets in 2018
With a COL index of 249, the New York hotel market achieved an ADR of $262.31 in 2018 as illustrated in the accompanying graph. This compares with St Louis, which had a COL index of 87.9 and an ADR of $105.24 in 2018.
The extent to which ADR is correlated with the six major components of the COL index, namely grocery items, housing, utilities, transportation, health care, and miscellaneous goods and services is provided in the table below. There is a strong positive linear relationship between these COL sub-indexes and ADR as illustrated by the correlation coefficients.
Correlation Between Average Daily Rate (ADR) & Cost of Living Indexes for Top 25 US Hotel Markets 2018
|Health Care (4.26%)||0.627|
|Total Monthly Expenses|
|Husband and Wife with Children Under 6||0.901|
|Husband and Wife with Children 6-17||0.900|
Source: Hotel Investment Strategies, LLC based on an analysis of STR Inc. and the Council for Community and Economic Research’s data.
Real ADR Equation: RADR=RADR(t-n) + RO(t-n) + DV(t), where RO = room occupancy and DV = dummy variables representing such variables
as quarters, Olympic Games, 9/11, Hurricane Katrina, etc., t= time subscript and n = time lag of n quarters ranging from 0 to –4.