Understand how, when, and why these metrics are generally used.
Several key metrics are typically used to track hotel performance within the hospitality industry. These metrics may be used as a) a benchmark to track historical performance of the hotel or b) a tool to compare performance with peer hotels that have similar size, characteristics, and location.
Generally, we think investors should be aware of the following three hotel metrics:
- Occupancy
An intuitive term, occupancy indicates how many rooms are occupied at a given time. This is often expressed as a percentage. For example, if there are 100 rooms, and 95 of those are occupied, the occupancy for that hotel is 95%.
The occupancy metric can help in estimating potential revenue, and from there, the overall performance of the hotel. Some firms may track vacancy rates instead of occupancy rates, which is just the opposite of occupancy. In other words, a 95% occupied hotel is 5% vacant.
Occupancy = Number of rooms occupied / Number of rooms existing
- Average Daily Rate (ADR)
ADR is the actual average rate paid by guests for rooms booked in any given period. It is calculated by dividing room revenue by rooms booked.
ADR = Room Revenue / Rooms Sold
Here’s an example: A hotel sold 200 rooms on a particular date. The total room revenue that day was $25,000. The ADR in that case would be $125.
The ADR is one factor used to determine the hotel’s profitability in a given period. Note that this number tells us demand for rooms that were actually booked and does not account for unsold rooms.
- Revenue per Available Room
When you multiply the ADR with the occupancy rate, you get what’s called RevPAR. RevPAR adds more color to ADR and is considered the hotel industry's gold standard for measuring top-line performance.1
RevPAR = ADR x Occupancy
As an example, knowing only that the hotel’s RevPAR for January was $76.50 isn’t necessarily helpful or complete information. However, when you track RevPAR over time, say within the last 12 months, it can be a useful tool to understand hotel performance. You can also compare a particular hotel’s RevPAR growth with similar properties within your competitive set - which is commonly defined as a group of hotels that are close direct competitors to that hotel - to help measure its competitiveness over a defined period.
What is the difference between ADR and RevPAR?
Both ADR and RevPAR provide different lenses to track a hotel’s health; RevPAR accounts for occupancy and ADR doesn’t.
While RevPar is affected by the number of unoccupied available rooms, ADR shows only the average rate of rooms actually sold. Put another way, ADR reveals how much revenue is generated based on rooms sold during a particular time, while RevPAR adds more information by factoring in the cost of unsold rooms and tying in occupancy to reveal how successful the hotel was at filling rooms to potentially optimize revenue.
RevPAR is always less than ADR, unless a hotel is 100% occupied. If the hotel is 100% occupied, ADR would then be equal to RevPAR because all rooms are occupied or sold. When RevPAR increases, it means that either the average room rate or the occupancy rate has increased.
Ultimately, all three metrics that we discussed work in tandem to inform pricing and decision making for an operator.
Figure 1: CoStar tracks Revenue per Available Room for the Hospitality industry
Source: Market Data, Hospitality, United States, CoStar, July 2023. This is for illustrative purposes only.
Want to learn more? Read more about the hospitality outlook.
Footnotes:
- “What is Revenue per Available Room (RevPAR)? And how to calculate it.”, STR, August 2019.
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