"The US lodging industry has not seen double-digit growth in RevPAR since the inflationary days of the late 1970s and early 1980s," says R. Mark Woodworth, president of PKF Hospitality Research. "The strong growth in RevPAR is driven by Moody's Economy.com's forecasts for income and employment. In 2012, Moody's is projecting income to grow at a 4.4% pace, something we have not seen since 2006. In addition, the 3.2% forecast growth for employment that year is an all-time high since 1988."
Until 2012, however, market conditions will remain relatively soft. For 2010, PKF-HR is forecasting a 1.1% decline in RevPAR, the third consecutive year of falling RevPAR for the US lodging industry. "Fortunately for hotel owners and operators, as economic conditions begin to turnaround in 2011, so should travel and the pricing power of hotel managers," Woodworth says.
While PKF-HR is forecasting a 1.1% annual decline in 2010 RevPAR, lodging market conditions will turn and improve throughout the year. In fact, as PKF-HR forecasted back in March of 2009, the demand for hotel rooms has been greater during the first quarter of 2010 than it was during the same period the prior year. This growth in demand is expected to persist throughout the year and result in an annual increase in rooms occupied of 1.5%.
Concurrent with the growth in demand is a reduced rate in the number of new hotel rooms opening. Supply is forecast to grow 1.2% in 2010, down from the 3.2% net increase in new rooms that came on line in 2009 according to Smith Travel Research. With demand rising at a 1.5% pace, the average occupancy rate for the US lodging industry should increase 0.3% to 55.2% in 2010. "This is obviously not great growth, but it is a step in the right direction after three years of declining occupancy," Woodworth notes.
Unfortunately for US hoteliers, a national occupancy level below the 60% mark means that rate discounting will persist, the firm says. PKF-HR does not believe that quarterly ADR will exceed 2009 levels until the third quarter of 2010. "Hotel managers know only too well that cutting room rates rarely results in increased profits. However, given the competitive conditions implied by occupancy rates in the '50s, many operators have once again employed the strategy of establishing a base of contract business to reduce their available inventory," Woodworth observes. "Such a tactic should position these operators to better capitalize on improving demand conditions: more aggressive pricing policies should result." PKF-HR forecasts ADR will increase 3.4% in 2011 after declining 1.4% in 2010.
Just two of six chain-scales are forecast to benefit from an increase in RevPAR in 2010. PKF-HR is projecting luxury hotels will enjoy a healthy 5.1% increase in RevPAR, while properties in the midscale without food and beverage segment will see their RevPAR rise 0.6%. In both segments, it appears that discounted room rates will be required to increase occupancy.
"The most prevalent rate discounting is forecast to occur in the upper-upscale segment," Woodworth notes. "Most big-box convention hotels fall into this category, so the decline in ADR reflects the negotiating leverage currently held by meeting planners." Hotels in all six chain-scales are projected to experience a decline in ADR during 2010.
Looking across the country, RevPAR for five of the nation's 50 largest markets is forecast to increase 6% or more in 2010. In Newark, Boston, and Anaheim, CA, RevPAR gains will be driven mainly by increases in occupancy. Conversely, rising room rates will propel RevPAR growth in Oahu and Salt Lake City.
The cities forecast to experience the greatest RevPAR declines in 2010 are Baltimore, Phoenix, Austin, Washington DC, and Houston. For the most part, the RevPAR losses in these cities are the result of ADR declines in excess of 2%. The one exception is Baltimore, which is one of two US markets projected to suffer from a decline in demand in 2010. The drop in Baltimore demand can be explained by the comparison to a relatively strong 2009.
"The composition of RevPAR change impacts a hotel's bottom line. In general, RevPAR growth that is driven by ADR is more profitable," Woodworth explains. "Given that declining room rates will offset the slight gain projected for occupancy, PKF-HR is forecasting a 5.3% decline in unit-level net operating income in 2010."
Woodworth notes that "… Hotel operators should feel increasingly confident about what the playing field will look like for the near- and mid-term."
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Natalie Dolce
Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.
