Lodging Demand for Urban Hotels in Major Metropolitan Markets

Hotel demand in large urban markets does respond to changes in income, but that demand is relatively inelastic, according to an analysis of 22 top metropolitan areas in the United States. The analysis, made possible through Smith Travel Research, examined room-night demand for 480 individual hotels from 1989 through 2000 and compared that demand to a set of economic measures, including gross domestic product (GDP) and the consumerconfidence index (CCI). Rather than examine aggregate demand against GDP, for instance, the study took the unusual approach of examining the effects of income on each hotel’s demand and then aggregated the individual results. The analysis found that every 1-percent increase in GDP was associated with a .44-percent increase in demand at the urban hotels in the 22 large markets showing that hotel rooms demand is relatively income inelastic. The study further examined income effects using a novel approach-by separating GDP into personal income and business income. This additional analysis confirmed the income inelasticity of hotel demand but also found that personal income changes have twice as great an effect on hotel demand than do changes in business income. Furthermore, the combined elasticity coefficients for personal income and business income approximate the coefficient for GDP. The analysis of the effect of consumer confidence provided the first known connection between consumers future expectations for income. While the effect is relatively small, it is significant with a .03-percent change in hotel demand for every 1-point change in the CCI. The study also examined price-related elasticity, examining changes in demand both when a hotel changes its own price (ADR) and the substitution effect that occurs competitors prices change (market ADR, or MADR). Separating the study sample according to STR’s market segments also yielded further insights about the income elasticity of demand for different hotel price points.