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Friday, March 18, 2011

The outlook for the U.S. lodging industry continues to improve, albeit at an uneven pace.  According to the March 2011 edition of Hotel Horizons®, PKF Hospitality Research (PKF-HR) forecasts that U.S. hotels in the main should achieve a 7.1 percent increase in rooms revenue (RevPAR) in 2011.  This is greater than the 5.6 percent RevPAR growth rate projected by PKF-HR in December 2010.

"In 2011, projections of rising employment and income should result in a solid 4.0 percent increase in the demand for lodging accommodations," said R. Mark Woodworth, president of PKF-HR.  "The improved business environment, combined with the 2.0 percent reduction in the payroll tax, will put more people on the road for both personal and professional travel."  According to Moody's Analytics January 2011 economic forecasts, U.S. employment and real personal income should rise 1.7 percent and 4.0 percent, respectively, in 2011.

The improved economy is only part of the reason for the robust 7.7 percent bounce in 2010 lodging demand.  Severe price discounts played a key role, as well.  "Our research has found that the record declines in average room rates (ADR) throughout 2009 and early 2010 induced people to take advantage of cheap room prices.  This has clearly now come to an end and PKF-HR forecasts that the ADR for U.S. hotels, which bottomed-out in 2010, will increase 3.8 percent in 2011," Woodworth said.

Woodworth noted that, while the industry recovery is expected to continue gaining momentum this year based on improving fundamentals, some segments are rebounding more quickly than others.
 

Tale of Two Forecasts

"The need to discount is representative of diverging conditions we are observing in both society and the lodging industry.  Just as select segments of the population have benefited from the rise in employment, we foresee that certain types of hotels will prosper during the lodging industry rebound more than others," Woodworth observed.

Data from the 2010 Performance Monitor by D.K. Shifflet & Associates provides further insight into consumer travel behavior by annual household income level.  In 2007, 46 percent of all occupied hotel room nights were from guests in the under $75,000 income level.  By 2010, this number decreased to 42 percent.  Conversely, while 11 percent of all hotel room nights in 2007 were from guests in the above $150,000 income level, this number increased to 14 percent in 2010.  "This indicates that those individuals less vulnerable to economic downturns continued to travel," Woodworth said.

Further evidence of this trend is the fact that the single largest income cohort frequenting the upper-priced chain-scale categories are households at an income level ranging from $75,000 to $149,000.  In luxury hotels, one in three hotel room nights are from customers in the above $150,000 income level, up from 18 percent in 2007.  Within the lower priced chain scale properties, hotel room nights from guests with household income levels under $75,000 make up more than 50 percent of accommodated demand.

"In general, the upper-tier hotels cater to guests that are benefiting the most from the improved economy.  Therefore, these properties are seeing increases in occupancy which yields greater pricing power.  As a result, these managers will have a greater ability to raise their room rates this year.  Conversely, the mid-market and lower-tier hotels will continue to lag in RevPAR growth despite offering the lowest rates and greatest discounts," said Woodworth.

The diversity of PKF-HR's forecast is evident when observing the 2011 RevPAR projections by chain-scale.  The luxury and upper-upscale segments are forecast to achieve RevPAR increases of 9.6 percent and 7.1 percent, respectively.  Among the chain-scale segments with the lowest rates, RevPAR is projected to increase by 6.4 percent for economy hotels and just 5.3 percent at midscale with food and beverage properties.

Rich Get Richer

"The driving force behind revenue growth in 2011 is clearly price positioning," Woodworth said.  "The higher the room rate, the greater the projected growth in ADR and, consequently, RevPAR."

Analyzing the chain-scale forecasts, approximately 65 percent of the revenue growth at the luxury and upper-upscale hotels will be attributable to increases in ADR as opposed to occupancy.  For the lower-tier segments, the ADR contribution factor drops to roughly 53 percent.  "As we know from prior research, RevPAR gains driven primarily by ADR growth are more profitable.  Therefore, the upper-tier hotels are expected to realize superior profit growth this year relative to all other property types," Woodworth said.

A similar story evolves when analyzing the PKF-HR Hotel Horizons® forecasts for 50 major markets in the U.S.  The list of cities forecast to achieve the greatest gains in ADR in 2011 is led by San Francisco, Boston, and New York.  Lagging in ADR growth in 2011 will be lower priced cities such as Raleigh-Durham, Richmond, and St. Louis.  The decline in the Federal travel per-diem is one reason why Washington, DC is the only market in the nation forecast to experience a decline in ADR this year.

Balanced Performance Not Realistic

Federal, state, and national officials continue to pull a variety of economic levers in an attempt to produce a recovery that has the greatest positive impact on the broadest spectrum of the population.  For the lodging industry, across the board evenly balanced performance will be tough to achieve given the discrete business cycles observed among the various property types, chain-scales and local markets.

"The hotel industry is extremely management and marketing intensive compared to other forms of real estate," said John B. (Jack) Corgel Ph.D., the Robert C. Baker Professor of Real Estate at the Cornell University School of Hotel Administration and senior advisor to PKF-HR.  "The number of factors that influence performance is large, and the relative influence of these factors will vary by property, location, market position, etc.  Understanding these drivers of change at the local market and property level will be critical to realizing superior returns as more investors come off of the sidelines with the continuing recovery."

To purchase a March 2011 Hotel Horizon® report, please visit www.hotelhorizons.com.  Reports are available for each of 50 major metropolitan areas in the U.S., and contain five year projections of supply, demand, occupancy, ADR, and RevPAR.

ABOUT PKF CONSULTING USA

Headquartered in San Francisco, PKF Consulting USA (www.pkfc.com) is an advisory and real estate firm specializing in the hospitality industry.  PKF Consulting USA is owned by FirstService Corporation and is a subsidiary of Colliers International.  The firm operates three companies: PKF Consulting USA, PKF Hospitality Research, Colliers International Hotels.  The firm has offices in New York, Boston, Indianapolis, Chicago, Philadelphia, Washington DC, Atlanta, Asheville, Jacksonville, Orlando, Tampa, Houston, Dallas, Los Angeles, Bozeman, Miami, Portland, Sacramento, and San Francisco.