What is the Average Daily Rate?
The Average Daily Rate (ADR) measures the average revenue generated per occupied room or rental unit, expressed on a per-day basis.
How to Calculate Average Daily Rate (ADR)
The average daily rate, or “ADR”, is a common metric in the hospitality sector and real estate market that measures the revenue production and profitability of short-term rental properties.
- Hospitality Sector → In the hospitality sector (i.e. hotels), the average daily rate (ADR) is a metric utilized to determine the effectiveness of the current business model, namely the pricing strategy, which ties into estimating the implied profit potential of a particular hotel property.
- Real Estate Rental Market → In the real estate rental market – particularly for short-term property rentals like Airbnb (C2C platform) – the average daily rate (ADR) quantifies the average rental income generated per occupied rental unit on a daily basis.
Frequently, the average daily rate (ADR) metric is tracked by property owners to closely monitor the performance of short-term rental properties.
The ADR metric is also a method to develop a more informed understanding of the seasonal trends and fluctuations in market demand that can affect their future revenue (i.e. “top line”).
The total revenue generated per day – which the average daily rate is an informative measure for – ultimately sets the limit on the property’s capacity for realizable profits.
In practice, the importance of the average daily rate (ADR) is tied to its role in guiding pricing strategy. The ADR is a practical metric for property owners to determine the effectiveness of their current pricing strategy (and if adjustments are necessary).
If the current revenue strategy seems to not be working – i.e. sales are trending downward – the property owner can make strategic decisions, such as offering more promotions or increasing prices to increase the revenue run rate going forward (and ensure internal profitability targets are met).
What is a Good Average Daily Rate?
By comparing the current average daily rate (ADR) to the rates from historical periods (or between different comparable properties), the property owner can obtain a better sense of the relative performance of their properties.
If the average daily rate (ADR) is rising, the property is implied to generate more revenue, resulting in greater profit potential (and vice versa for a falling average daily rate).
However, there are limitations to using the average daily rate (ADR) metric, as the calculation neglects two factors:
- Vacant Units (or Days) → The ADR metric is not adjusted for a property’s vacant units – i.e. no occupancy by a tenant – or the days during which the property is closed.
- Non-Operating Revenue or Costs → The property’s additional sources of revenue and fees incurred on the side, such as cleaning fees and other service costs, are ignored in the ADR metric.
Specific to the hospitality sector, the average daily rate (ADR) must be utilized in conjunction with other key performance indicators (KPIs), such as the occupancy rate and RevPAR (revenue per available room).
The usage of various hospitality KPIs, rather than relying on one metric by itself, contributes towards a more comprehensive understanding of a property’s long-term performance and more accurate forecast models.
- Occupancy Rate → The occupancy rate is the ratio between occupied rental units to total units available for rent, expressed as a percentage. The inverse of the occupancy rate is the vacancy rate, which measures the percentage of unoccupied units relative to the total number of units available for rent.
- Revenue Per Available Room (RevPAR) → The RevPar metric is the total revenue generated per room, inclusive of all units, occupied or not. By multiplying the average daily rate (ADR) by the occupancy rate, the resulting metric is the revenue per available room (RevPAR).
Average Daily Rate Formula (ADR)
In the hospitality sector, the average daily rate (ADR) can be determined by dividing the rental income on a particular date by the number of occupied rooms on a property.
For example, if a hotel brought in $50,000 in revenue on a specific date and 200 rooms were occupied, the ADR is $250.
- Average Daily Rate (ADR) = $50,000 ÷ 200 = $250
The formula to calculate the average daily rate (ADR) in the real estate market is conceptually the same, aside from minor differences in terminology.
For example, if an Airbnb property owner brought in $5,000 in revenue on a specific date on ten rental properties, the ADR is $1,000.
- Average Daily Rate (ADR) = $5,000 ÷ 10 = $500
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We’ll now move on to a modeling exercise, which you can access by filling out the form below.
1. Hotel Average Daily Rate Calculation Example
Suppose a hotel has a total of 250 rooms available for occupancy on May 1, 2023. On that particular date, the occupancy rate is expected to be 80.0% based on the number of confirmed bookings, inquiries to express interest, and the hotel’s historical data.
- Total Number of Rooms Available for Occupancy = 250
- Occupancy Rate (%) = 80.0%
The product of the total number of rooms available for occupancy and the occupancy rate is the number of occupied rooms, which comes out to 200 rooms.
- Number of Occupied Rooms = 250 × 80.0% = 200
Based on the pricing data per customer, the total revenue from the occupied rooms is estimated to be $60,000.
- Total Revenue from Occupied Rooms = $60,000
By dividing the total revenue from occupied rooms by the number of occupied rooms, we arrive at an average daily rate (ADR) of $300.
- Average Daily Rate (ADR) = $60,000 ÷ 200 = $300.00
2. Real Estate Rental Property ADR Calculation Example
In our next exercise, we’ll calculate the average daily rate (ADR) for a short-term real estate rental building.
The property owner rents out the building’s units on a monthly basis to companies in need of a workspace, similar to the WeWork business model.
There are a total of 20 rental units in the building, and as of May 1, 2023, the confirmed occupancy rate is 50%.
- Total Number of Rental Units = 20
- Occupancy Rate (%) = 50%
By multiplying the total number of rental units by the occupancy rate, the number of occupied units for the month of May is 10, i.e. half of the rental units in the building are vacant.
- Number of Occupied Units = 20 × 50% = 10
The monthly rental revenue, inclusive of all tenants, is approximated to be $62,000. Since the average daily rate – as implied by the name – is on a per-day basis, our next step is to adjust the revenue amount by dividing it by the number of days in the month (31).
Therefore, on an individual tenant level, the total rental revenue per day amounts to $2,000.
- Monthly Rental Revenue Per Tenant = $62,000
- Adjustment Factor = 31 Days
- Total Rental Revenue, Per-Day Basis = $62,000 ÷ 31 = $2,000.00
In conclusion, the average daily rate (ADR) on the short-term rental property is $200.00, which we determined by dividing the total rental revenue per day by the number of occupied units.
- Average Daily Rate (ADR) = $2,000.00 ÷ 10 = $200.00
