Hotel occupancy could slip in third quarter.

In an updated forecast, issued March 11, Coopers & Lybrand LLP's National Hospitality Consulting practice sounds a cautionary note. Hotel occupancy may begin to decline as early as this year's third quarter, if the possibility of a cyclical downturn determined by a leading macroeconomic forecaster comes to fruition.

Coopers & Lybrand's econometric forecasting model uses data from The WEFA Group, a leading macroeconomic forecaster, which now estimates a 35 percent probability of a cyclical downturn. A cyclical downturn occurs when there are at least three consecutive quarters of negative growth in gross domestic product (GDP). Applying that scenario to Coopers & Lybrand's model would mean the 65.9 percent hotel occupancy reached in the fourth quarter of 1995 would begin slipping as early as the third quarter of this year, and drop to a low of 64 percent by the second quarter of 1997.

Notes Dr. Bjorn Hanson, chairman of the National Hospitality Consulting practice at Coopers & Lybrand, "The industry has experienced two consecutive years of occupancy rates above the long-term average. WEFA's increased probability of a downturn should serve as an early warning that this trend will not continue indefinitely."

WEFA's downturn scenario calls for gross domestic product (GDP) growth of 0.9 percent in 1996, compared to 2.4 percent in its baseline scenario, which Coopers & Lybrand used to produce its U.S. lodging forecast. WEFA currently estimates the probability of a cyclical downturn at 35 percent; the chances for slow growth are now 14 percent; and the prospects for high growth are now only 1 percent. The probability of its baseline scenario is now 50 percent.

"Even if the economy doesn't suffer a downturn, the expansion underway in the lodging industry over the next three years will not bring about significant advances in occupancy," cautions Hanson.

According to the latest Coopers & Lybrand forecast - published in the January 1996 Coopers & Lybrand Hospitality Directions research journal - occupancy will rise only slightly from the 65.9 percent posted at the end of 1995 to 67 percent by the end of 1998 because of slower growth in demand and a dramatic increase in construction, based on room starts. In 1995, room starts reached 81,900, the highest level since 1989. Coopers & Lybrand forecasts room starts to increase steadily to 92,400 by 1998.

"Nevertheless, hoteliers have made positive changes over the past five years - paring operating costs, restructuring unprofitable departments, and implementing productivity enhancements - all of which have provided them with a profit cushion," says Hanson. "This should make industry profitability less vulnerable to an economic slowdown."

In 1991, when the industry was still declining in occupancy and losses were mounting, Coopers & Lybrand's forecast model predicted that 1993 would be a profitable year and the first year in six in which average daily rates would increase by more than inflation. Both predictions proved accurate.

Coopers & Lybrand Hospitality Directions is a quarterly research journal that gathers and analyzes industry empirical research and financial data, reveals developing industry trends, and provides timely strategic information valuable to hospitality industry leaders, owners, management, investors and attorneys. Each issue includes a 12-quarter forecast based on an econometric industry model.