Australia’s Hotel Industry Thrives on Occupancy-Driven Growth

Australia’s hotel industry has experienced significant growth in 2023, outpacing many global markets in terms of revenue per available room (RevPAR). Unlike other countries, Australia’s RevPAR growth is primarily driven by occupancy rather than average daily rate (ADR) increases.  Hannah Smith of STR examines the dynamics of hotel compression in major Australian cities and the factors contributing to this growth.

RevPAR Growth in Australia

Australia has demonstrated a remarkable performance in the hotel sector, with 84% of its submarkets reporting an increase in RevPAR during the first ten months of the year. Among the world’s 15 largest countries by hotel room supply, Australia ranks seventh in year-to-date RevPAR growth, surpassing nations such as Canada, Italy, the U.K., and the U.S. The unique aspect of Australia’s development is that it is driven by increased occupancy rather than by ADR, unlike most other regions.

Compression Trends in Sydney

Historically, compression nights, where occupancy exceeds 90%, have been crucial for major markets like Sydney. In 2019, 20% of days in Sydney reported such high occupancy. In 2023, there has been a rebound, with over half of the days exceeding 80% occupancy and 13% surpassing the 90% threshold. The ADR premiums in Sydney have remained stable, with ADR rising as occupancy increases. Notably, the timing of compression days has shifted from weekdays to weekends, indicating a shift from business to leisure-driven demand. This shift has resulted in higher ADRs on weekends than on weekdays, with a difference of 7% to 16%.

Compression Dynamics in Melbourne

Melbourne’s compression story differs from Sydney’s. In 2023, most nights fell below 80% occupancy, with only a few days exceeding 90%. The ADR premium on high-occupancy days has increased significantly, particularly due to events such as the Formula 1 Australian Grand Prix. Unlike Sydney, Melbourne has traditionally had a higher weekend ADR than weekdays, a trend that has become more pronounced. The leisure demand is a key factor in determining high-occupancy days in Melbourne.

Impact on Hotel Classes

Lower-end hotel classes have benefited more from leisure-driven compression days. Midscale hotels, for instance, have seen a 70% year-over-year growth on weekends with occupancy exceeding 90%. This growth has led to rate compression on high-occupancy days, with different hotel classes pricing similarly, except for the luxury class, which commands a higher rate premium.

Supply Growth and Market Dynamics

Some Australian markets have experienced significant supply growth, although demand has not always kept pace. Perth, for example, has seen a 12% increase in supply and the second-highest occupancy growth compared to 2019 levels. Brisbane stands out with nearly 9% year-to-date room rate growth, driven by a shift towards more luxury supply. Brisbane’s ADR is 60% higher than in 2019, highlighting its strong market position.

Conclusion

Australia’s hotel market is experiencing robust year-over-year growth, although many markets have not yet returned to pre-2019 performance levels. Compression nights remain a crucial indicator of hotel performance, particularly for city center hotels. With corporate group travel not expected to surge in the near future, hoteliers may increasingly rely on leisure groups to achieve high ADR premiums.

Discover more at STR.