The 2018/19 season was Epic (or Ikonic depending on your pass preference) with every major resort posting record sales tax revenue, occupancy, and lodging rates. At the same time real estate continued to skyrocket in most mountain communities. With all this good news there is one metric that is bucking the trend and painting a drastically different picture which is considerably less Epic or Ikonic than the snow.
What metric is worrying?
Don’t get me wrong, last season was amazing due to abundant snowfall. This led to huge demand to visit Colorado resorts to take advantage of the great conditions. As a result sales tax revenue and occupancy hit all time records in almost every major ski resort. Along with all this good news, one statistic stood out to me. Room rate growth has slowed dramatically up only .7% which shows consumers are getting a bit price weary.
Why is Room rate growth so important?
Room rate growth or lack thereof is indicative of consumer “pushback” on increasing rates. The consumer is not willing to pay higher rates to rent a room. The room rates have hit a peak which means the only growth in sales tax revenue will need to come from increased occupancy.
The 18/19 season had the best snowpack in 20 years which led to record occupancy. Occupancy is unlikely to increase much beyond the current record year and best case will stay flat and likely decline due to snow conditions. With room rates unable to increase due to consumer pushback this means sales tax revenues will at best stay flat and likely decline in most mountain communities.
Significance of consumers unwilling to accept higher room rates
Elasticity is an important economic concept that is necessary to fully grasp the future of the industry. Price Elasticity is an economic theory that basically shows the relationship between price and demand. In most cases as price increases demand at some point will decrease. Buyers will migrate to other less expensive options that might offer similar value. By room rates staying constant this shows me that in Colorado the price elasticity is “elastic” meaning price cannot increase much without impacting demand. (see more on this concept).
If you talk to anyone about skiing or snowboarding in Colorado two statements will always come up. First, the powder in Colorado is the best in the world. Second, man skiing and snowboarding has gotten expensive! With the major resorts consolidating (Alterra buying Winterpark and Steamboat) and Vail resorts and Copper mountain owning the rest this pricing strategy is going to become more profound.
Summary
What does this all mean? We have reached a “tipping point” regarding pricing. It appears that the industry has found a “sweet spot” with pricing where prices are at the threshold to not impact demand, but if prices are increased further demand will no doubt fall off. On the flip side if demand begins to fall off then prices will fall accordingly. We saw in the last recession that in 08 demand declined substantially and room rates / revenue declined as well. Being at the tip of the mountain, the best case is to hope for a ridge where the market stays flat, but sooner or later it is inevitable that you will go down the other side of the mountain.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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