The average price of hotel rooms has been increasing at an estimated annualized rate of 4.2% in the three years to 2017. Rising demand stemming from increases in domestic trips by US residents and inbound trips by non-US residents has driven price growth. Consumers taking trips often stay in hotel rooms while they are away. Therefore, more trips push up demand for hotel rooms. To a lesser extent, a rise in per capita disposable income has also contributed to demand growth by providing consumers with more capital to spend on trips and hotel rooms.
Suppliers’ rising input costs have also impacted prices because they have passed their cost increases to buyers in the form of higher prices. There are two main categories of purchases for suppliers: food and beverages and room supplies. In the three years to 2017, the price of food and beverages has been rising, as have marketing, utility and other operating costs. These cost increases have been contributing to price increases for full- and limited-service hotel rooms.
Despite rising prices, low price volatility has benefited buyers by protecting them from extreme fluctuations in room rates and allowing them to more accurately predict and budget for the cost of hotel rooms. Overall, however, the level of price volatility has not significantly impacted buyers’ purchasing decisions because, although low price volatility has reduced the probability of price spikes, it has not prevented gradual price increases. Buyers that need to go on trips often do not have much leeway in terms of when or where they go. As a result, demand remains high despite price growth. Booking rooms as far as possible in advance of an event often yields lower rates.
In the three years to 2020, hotel room prices are expected to rise at an average annual rate of 3.7% due to further increases in demand. In particular, increases in the number of domestic trips by US residents and inbound trips by non-US residents will drive demand growth by expanding the pool of consumers in need of hotel rooms. A rise in per capita disposable income will also contribute to demand growth by providing consumers with more capital to spend on hotel rooms. As demand rises, more buyers will be vying for a limited number of hotel rooms, thereby leading to rate increases.
Prices will also rise in response to continued growth in the price of food and beverages because price growth for these goods will lead to increased costs for full-service hotel suppliers. Suppliers will, in turn, pass these cost increases to buyers in the form of higher room rates. More specifically, the price of food and beverages is forecast to rise at a faster rate from 2017 to 2020 than it has in the previous three years, contributing to faster price growth in the next three years. Additionally, utility rates will continue to rise, compelling suppliers to increase room rates to account for their higher operating costs.
Fortunately, low year-on-year price volatility will continue to allow buyers to accurately budget for purchases. Buyers should, however, be cognizant of rate shifts throughout the year as a result of tourism trends and special events. Due to rising prices, buyers should attempt to book rooms sooner than later in most cases. Overall, the expected increase in price will harm buyers.