Uncertainty Begins To Dissipate For Hotel Industry
US hotel outlook continues as expected
ATLANTA - The recovery of the U.S. lodging industry continues to improve, buoyed by a sustained expansion in the demand for hotel rooms across the country. Accordingly, Colliers PKF Hospitality Research (PKF-HR) has edged up its forecasts for U.S. hotel performance for 2010 and re-affirmed the outlook for 2011.
In the recently released December 2010 edition of Hotel Horizons®, PKF-HR forecasts that lodging demand will grow 7.8 percent in 2010. This is nearly four times greater than the 2.0 percent increase in hotel supply, resulting in a record 5.7 percent rise in occupancy.
"Ninety days ago in the September 2010 edition of Hotel Horizons®, the PKF-HR hotel forecast for change in 2010 lodging demand was 7.3 percent. Given the actual rise in demand reported by Smith Travel Research (STR) through the first three quarters of the year, along with a modest improvement to the economic forecast from Moody's Analytics, we have increased our projection of annual demand growth to 7.8 percent," said R. Mark Woodworth, president of PKF-HR.
"As we anticipated, average daily rate (ADR) growth turned positive in the third quarter; however, and consistent with history, ADRs have, and will continue, to lag the recovery in occupancy," Woodworth added. "Despite the strong growth in demand, we are still forecasting a slight 0.1 percent decline in hotel ADR for 2010." The 0.1 percent decline in ADR combined with the 5.7 percent increase in hotel occupancy results in an annual rooms revenue per available room (RevPAR) gain of 5.6 percent for the year. This is a full percentage point greater than the 4.6 percent RevPAR growth rate forecast back in September of 2010.
The PKF-HR outlook for 2011 has also improved, albeit to a limited degree. The December 2010 Hotel Horizons® forecast calls for a 3.3 increase in demand, which will drive a 6.3 percent rise in hotel RevPAR next year. These are 0.1 and 0.3 percentage points, respectively, greater than the firm's prior forecast.
"Severe room rate discounting during the first half of the year has driven the quicker than expected demand growth in 2010," Woodworth said. "In 2011, managers should become more aggressive in raising their ADR. However, as we have been expecting for some time, pricing power will not fully return until 2012 when we expect to see a very attractive gain in RevPAR." PKF-HR is forecasting RevPAR growth of 10.4 percent in 2012 and 10.0 percent in 2013. These represent the first time the national RevPAR has grown in excess of 10 percent since STR started reporting the statistic in 1987.
Major Market Movements
Major market hotel performance leads the recovery of the U.S. lodging industry in 2010. And, like the national forecast, the outlook has improved since the September 2010 Hotel Horizons® forecast report.
By year end, hotels in the 50 U.S. cities that comprise the PKF-HR Hotel Horizons® universe should enjoy a 6.4 percent increase in RevPAR. This is 0.8 percentage points greater than the gain forecast for the overall U.S. lodging industry. Driving the major market RevPAR growth premium is the strong 9.3 percent estimated gain in demand.
"There are several factors that have contributed to the robust growth in major market hotel performance in 2010, not the least of which was a shift in group demand," Woodworth said. "Most major cities are primary meetings destinations and we know from our annual survey of meeting planners (sponsored by ConventionSouth magazine) that they were avoiding these more expensive markets in 2008 and 2009. However, our 2010 survey of meeting planners found that the larger markets became more appealing because of low room rates. 2010 was the year in which urban markets represented significant value as a meeting destination.
"While the aggregate 2010 performance numbers for the 50 major markets look appealing, a dose of reality needs to be injected. If you remove New York City from the equation, the RevPAR forecast drops from 6.4 percent to 5.4 percent," Woodworth noted. "New York's ADR is forecast to rise 6.6 percent this year. It is just one of the 10 markets that will enjoy an ADR increase in 2010."
Looking towards 2011, the pace of RevPAR growth for the major market sample is expected to slow down somewhat. PKF-HR is forecasting the RevPAR for this group to grow 5.6 percent next year, driven mostly by a relatively strong 4.1 percent increase in ADR. "The year-over-year comparisons, while still quite favorable, will appear somewhat less robust in 2011," Woodworth explained.
Concurrent with the improved outlook for revenue is growth of the bottom line. For 2010, PKF-HR is projecting that the average hotel in the U.S. will achieve a 5.6 percent increase in net operating income (NOI). This will represent a marked turnaround from the record 35.4 percent decline experienced in 2009. The pace of profit growth picks up in 2011 when PKF-HR is projecting a hotel NOI increase of 11.1 percent, a rate which is expected to rise by more than 15 percent in both 2012 and 2013.
"From an investor perspective, the sooner than expected increase in rooms revenue, along with the accelerated lift in NOI, is welcome news to everyone in the industry," said John B. 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. "Hotel capitalization rate compression has been driven by a general decline in 5 – 10 year interest rates as much as REIT participation. The renewed growth of hotel NOIs will help offset a reversal in interest rate trends should it materialize, which will help keep capitalization rates in check."
"After suffering through the all-time worst year of performance in 2009, U.S. hotel owners and operators are eager for growth. Fortunately we have documented a definite turnaround in 2010 that we think will serve as the base for some very strong gains in both hotel revenue and hotel profits in the years to come," Woodworth observed.
"Given the numerous drags on the economy, such as the depressed housing market, high unemployment, and Federal deficit worries, the swift pace of recovery in the lodging industry is quite remarkable," Corgel concludes.