Has the bottom fallen out of hotel room rates?

Saturday, 3 August 2024

Wellington’s average hotel room rate was $174 in July, down 23% on the same time last year, HDNZ figures show.

Government cost cutting has contributed to a “massive” decline in hotel room rates in Wellington, but the hotel sector is hurting in other parts of the country too.

The average daily room rate in Wellington was $174 in July, a decline of 23% on the same time last year, new Hotel Data New Zealand (HDNZ) figures show.

Revenue per available room (RevPar), which combines average occupancy and average daily rate and is the key metric used by the industry, was $97. That was down 36.2% on last July, and down 28% on July 2019.

But the decline was not isolated to hotels in the capital, with the figures showing Auckland hotels had also been hit hard.

The average daily room rate in Auckland was $194 in July, an annual drop of 13%, while RevPar was $127, which was down 20.9% on the same time last year, but flat on July 2019.

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Hotel Council Aotearoa strategic director James Doolan said the revenue drops were “massive” for any business, and worse than the usual seasonal dip in winter.

“Logically, hotels would rather drop rates than have rooms go empty. Hoteliers cannot stockpile unsold rooms. There’s no such thing as pent-up demand for yesterday’s unsold hotel room.”

But the declines were particularly significant as they came at a time when operating costs were continuing to rise, he said.

“In the same way ordinary Kiwis are experiencing a cost of living crisis, hoteliers have had to juggle higher food, beverage, insurance and wage costs, and much higher interest rates than pre-Covid. Margins are being squeezed.”

Unlike airlines, hotel-owners could not respond to slow demand by reducing fleet size, he said.

“The accommodation sector is highly competitive with consumers having multiple choices for where to stay. Consequently, room rates fall when hotels chase occupancy.”

Doolan said the drivers behind the situation were complicated and multi-faceted, but ultimately the country had failed to return to pre-Covid demand levels quickly enough.

Local and central government had under-invested in tourism attraction, by reducing spending on event attraction and destination marketing at national and local levels, he said.

Hotel room rates fall when hotels chase occupancy, the Hotel Council Aotearoa’s James Doolan says.

“Auckland Council effectively stopped 90% of its event attraction and destination marketing, a terrible outcome when 70% of all international tourists land in Auckland first, and Tourism New Zealand’s budget was also reduced.

“Meanwhile, domestic airfares have increased significantly, which dampens demand for domestic tourism.”

There were flow on effects — if hotels were not full, then restaurants, retailers, transport providers and attractions were also likely to suffer, he added.

Wim Ruepert, from accommodation industry consultant Horwath HTL, said room rates, and RevPar for hotels across the country were down, as was occupancy, according to HDNZ data.

“Room rates are highly influenced by demand, when occupancy is high hotels can charge more, but when occupancy is down, or flat, there is less opportunity to charge higher rates.”

The Wellington and Auckland markets had the most significant declines in room rates, although there were different dynamics at play in each market, he said.

“In Wellington, where rates over the first six months of this year were down by 8.5% on the same time last year, there has been contraction in government business, and it is less busy because of government cut backs.

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“There’s less consultants and associated support activity using hotels, and that’s having an impact. At the same time, the convention centre has not had as big an impact on Wellington hotels, as Te Pae has on Christchurch hotels.”

Auckland has been affected by a big increase in supply, with a number of new hotels offering about 900 new rooms coming on to the market over the past year, he said.

“That’s a 6.5% increase, and the supply, which was planned before Covid and in anticipation of the NZ International Conference Centre opening, has heavily impacted on Auckland hotels.

“Ongoing delays with the conference centre, and a lack of major events during the winter months, impact on occupancy, and room rates have gone down because there is more competition.”

Ruepert said the decline in domestic demand was too significant to be offset by international visitors, but there were some positive signs of recovery in international arrivals.

Providing airline connections returned to the same level they were at last summer, the summer season should be pretty strong for hotels, he said.

“Events, such as WOW in Wellington or All Blacks games or conferences, are also a big driver of demand for hotels. But they have a short impact, so we need to attract more of them to the main centres.”