US hotel industry now breaks even at 55.5 percent occupancy.

Even as U.S. hotel occupancy rates are forecast to continue to decline through the millennium, U.S. hotels have achieved an historically low "breakeven occupancy" rate, or the occupancy level at which a hotel's expenses and revenues are equal, according to new analysis by Bear, Stearns & Co. and PricewaterhouseCoopers, using data from Smith Travel Research.

U.S. hotels' occupancy rate will decline from 63.9 percent in 1998 to 62.9 percent in 1999 and 62.5 percent in 2000, according to an econometric forecast by the PricewaterhouseCoopers lodging and gaming group. But analysis shows the U.S. hotel industry overall achieves breakeven occupancy at approximately 55.5 percent. That breakeven level is down from 62.6 percent in 1992 the year at which the lodging industry returned to profitability following several years of significant financial losses.

"The hotel industry's new, lower breakeven occupancy level comes as we are nearing the end of a boom cycle in U.S. lodging," said Jason Ader, New York-based Bear Stearns senior managing director. "As a result of the new breakeven level, the hotel industry may find itself in a more defendable position now than in previous down cycles."

"Three factors underlie the dramatic reduction in breakeven occupancy to 55.5 percent," according to Bjorn Hanson, Ph.D., New York-based chairman of the PricewaterhouseCoopers lodging and gaming group. "They are: average daily room rates that have been increasing at greater than the rate of inflation; a redefined hotel revenue mix that emphasizes rooms revenue over revenue from low-margin food and beverage operations; and lower debt and equity costs for the industry as a whole.

Breakeven Occupancies Vary By Hotel Segment

Bear Stearns and PricewaterhouseCoopers calculated breakeven occupancy levels for eight of the nine Bear Stearns hotel segments (the Deluxe, Upscale, Luxury, Midscale with Food and Beverage, Midscale without Food and Beverage, Economy, Budget and Upper-Tier Extended-Stay segments).

Additionally, for each segment, the firms compared the new breakeven occupancy level to the segment's 1997 reported occupancy level. This analysis was performed to ascertain how close each segment is operating to its breakeven level.

Of the eight segments tested, Upscale hotels are operating closest to their breakeven occupancy level. The Upscale segment breaks even at 63 percent occupancy, according to Bear Stearns and PricewaterhouseCoopers. In 1997, the upscale segment reported occupancy of 69.4 percent. That's a narrow gap of just 640 basis points (or 640 hundredths of a point) between breakeven occupancy and 1997 occupancy.

'Even with such a narrow gap between reported and breakeven occupancy, demand for rooms in the Upscale segment would have to drop by 9.2 percent for the Upscale segment to rub against its breakeven level," Ader explained. "That's a fairly substantial drop."

The biggest occupancy surpluses are in the Midscale without Food and Beverage, Economy and Extended-Stay (Upper Tier) segments. Their combinations of low cost structure and relatively high average daily room rates gives them the greatest amount of insulation from occupancy declines.

The Midscale without Food and Beverage segment breaks even at 49 percent occupancy, according to Bear Stearns and PricewaterhouseCoopers. Meanwhile, that segment reported a 1997 occupancy rate of 67.1 percent, according to Smith Travel Research, for a cushion of 1,810 basis points (or 1,810 hundredths of a point) between breakeven occupancy and reported occupancy.

The Economy segment breaks even 41 percent, according to Bear Steams and PricewaterhouseCoopers. The economy segment reported a 1997 occupancy level of 58.5 percent, according to Smith Travel Research, for a cushion of 1,750 basis points between breakeven occupancy and reported occupancy.

The Upper-Tier Extended Stay segment breaks even at 60 percent occupancy, according to Bear Stearns and PricewaterhouseCoopers. Meanwhile, that segment reported a 1997 occupancy rate of 79.7 percent, according to Smith Travel Research, for a cushion of I, 180 basis points between breakeven occupancy and reported occupancy.

These results are encouraging, as the Upper-Tier Extended Stay and Midscale without F&B segments have seen some of the industry's highest supply growth over the past two to three years, Hanson of PricewaterhouseCoopers and Ader of Bear Steams agree.