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2006 U.S. lodging industry: performance to remain strong as growth slows.

Sometimes cliches do say it best. For U.S. hoteliers, thankfully "you don't take percentages to the bank." In 2006, hotels in the major US. lodging markets will achieve favorable levels of occupancy, average room rates, and profit margins compared to long term averages. It may be a few more years before we see profits return to pre-2001 levels, but most hotels will exceed their 2000 total revenue levels for a second year in a row during 2006. All in all, our forecasts tell the story of another strong year of operation for U.S. hotels in 2006.

However, as analysts we tend to look at trend lines, hence the name of our publication. We focus on movements from year to year measured on a percentage basis. When taking this approach to analyze our forecast for 2006, a hotelier might get somewhat depressed. The Winter 2006 Hotel Outlook forecast prepared by PKF Hospitality Research (PKF-HR) and Torto Wheaton Research (TWR) calls for a gain in RevPAR of 4.0 percent in 2006, a full 7.2 percentage points less than the strong 11.2 percent RevPAR gain estimated for 2005. In fact, all but three (Newark, Cleveland, and Boston) of the 52 markets analyzed by TWR and PKF-HR are forecast to experience a slowdown in RevPAR growth in 2006.

Is the slowdown in RevPAR growth a signal that the U.S. lodging industry is heading for a recession? Should hotel owners and operators begin to panic? The answer to these questions is clearly no. However, all interested parties should be aware that lodging is a cyclical industry and the slowdown in growth is an indication that we are exiting the "recovery" stage and approaching a period of stabilized performance. The good news is that we foresee a fairly extended period of stabilized performance relative to historical cycical Patterns. There are no current indicators that foretell an imminent industry recession.

2005 In Review

By year-end 2005, hotels located in the major U.S. markets will have achieved an 11.2 percent gain in RevPAR. Analyzing PKF-HR's history of U.S. major market performance, this is the strongest one-year gain in RevPAR since 1984. Entering 2005, PKF-HR and TWR did forecast growth in ADR to exceed growth in occupancy; however, the magnitude of the increases in both occupancy and ADR surpassed expectations.

In general, full-service hotels performed better than limited-service properties in 2005. On average, full-service hotels across the nation enjoyed an 11.3 percent gain in RevPAR during 2005, while limited-service properties saw their RevPAR grow 10.6 percent. Exceptions to this pattern were observed in the South Central and South Atlantic regions of the country where limited-service RevPAR growth did exceed full-service RevPAR growth.

Growth in average daily room rates was the main driver of RevPAR gains in 2005. The 11.2 percent rise in national RevPAR was the result of a 3.4 percent increase in occupancy and 7.5 percent growth in ADR. Once again, hotels in the South Central region followed a different pattern where the 6.6 percent increase in occupancy was the main impetus of the 11.2 percent growth in regional RevPAR. The South Central region includes hotels located in states that received most of the citizens displaced due to hurricanes Katrina and Rita. These hotels accommodated the additional surge in demand without significantly increasing their room rates.

2006--Slower Growth

Hotels in the major markets of the U.S. are forecast to experience their third consecutive year of RevPAR growth in 2006. The PKF-HR/TWR Winter 2006 Hotel Outlook forecast calls for an occupancy increase of 0.9 percent and ADR growth of 3.1 percent. Combined, these two measurements will result in an estimated 4.0 percent growth in RevPAR for 2006.

Having experienced deeper declines in performance during the 2001 through 2003 industry recession, we saw full-service hotels enjoy a faster pace of recovery during 2004 and 2005. Therefore, the full-service hotel segment appears to have reached its level of stabilized performance sooner than limited-service hotels. In 2006, full-service hotels are forecast to achieve a RevPAR gain of 3.7 percent. This compares to a forecast increase in limited-service RevPAR of 5.0 percent. The main reason for the difference in RevPAR forecasts is the relative ability of limited-service hotels to continue to increase their occupancy in 2006 compared to the full-service hotels.

Analyzing the outlook on a regional basis, hotels in the Mountain and Pacific Region are forecast to achieve the greatest gains in RevPAR (6.4 percent) during 2006. Hotels in this region are expected to enjoy a 5.1 percent gain in ADR for the year, a full two percentage points above the national average. Lagging in RevPAR growth during 2006 will be the hotels in the South Atlantic region (1.2 percent). Hotels in this region are forecast to experience flat occupancy levels and minimal gains in ADR. However, it should be noted that the limited occupancy growth is due to the fact that several of the big Florida markets are approaching their realistic capacity levels. Hotels in Miami, Orlando, Fort Lauderdale, and West Palm Beach are all forecast to achieve occupancy rates in the low seventies for a second consecutive year in 2006.

Consistency Ahead

Anyone entering the US. hotel industry in the past few years expecting endless double-digit growth in RevPAR was ill informed. The extraordinary RevPAR growth rates observed for 2004 and 2005 were significantly influenced by the need for the market to "make-up" for the extraordinary declines in performance experience from 2001 through 2003.

Looking forward, the PKF-HR/TWR Hotel Outlook forecast model projects stabilized occupancy rates and moderate gains in ADR for the foreseeable future. As noted before, it appears that the US. lodging industry is entering a period of stabilized performance with no downturns in sight. This should

result in relatively low levels of revenue and income volatility for hotel owners and operators. In other words, future revenue and profit growth should be consistent, if not exciting.

PRICES ON THE RISE

Through the first three quarters of 2005, the median price to purchase a U.S. hotel was 44.9 percent greater than the price paid for hotels during the same period in 2004. This finding is based on an analysis of 625 transactions recorded by PKF Hospitality Research.

Through September 2005, the average hotel in the U. S. sold for $54,688. This compares to $37,725 per room for properties purchased during the first nine months of 2004. Given the similarity in hotel characteristics (size, age, affiliation, etc ...) between the 2005 and 2004 sample, we attribute the majority of the price increase to investor optimism and an expectation of continued strong market conditions.

While the operating characteristics have remained fairly constant, we observed a few shifts in buyer preferences:

Hotels in the big markets along the Atlantic and Pacific coasts appear to be more appealing than hotels located in the mid-section of the nation.

* The appeal of full-service hotels continues to grow, as opposed to limited-service properties.

* Some of the rise in full-service transaction activity can be attributed to an increase in the number of small boutique properties bought and sold.

* We noticed an up tick in upscale extended-stay activity, as well as traditional full-service, all-suite hotels.

The Winter 2006 Hotel Outlook forecast prepared by Torto Wheaton Research and PKF Hospitality Research calls for a period of stabilized market performance levels during the next few years. Look for slight movements in occupancy, combined with moderate increases in average daily room rates. Given current economic and market factors, there does not appear to be an industry recessionlooming. This will continue to boost investor confidence.
MAJOR U.S. HOTEL MARKETS
Annual Results--2004-2006 Forecast
Regional Performance

 Occupancy

 2005 2006
 2004 Forecast Forecast

New England and Middle Atlantic Cities
 All Hotels 69.4% 71.0% 71.8%
 Full-Service 70.9% 72.8% 73.6%
 Limited-Service 66.1% 66.9% 67.8%

North Central Cities
 All Hotels 59.5% 61.2% 62.2%
 Full-Service 62.5% 64.0% 64.6%
 Limited-Service 56.6% 58.0% 59.4%

South Atlantic Cities
 All Hotels 67.7% 68.7% 68.7%
 Full-Service 68.2% 69.3% 69.0%
 Limited-Service 65.2% 66.7% 67.3%

South Central Cities
 All Hotels 59.4% 63.3% 64.1%
 Full-Service 61.0% 64.1% 64.5%
 Limited-Service 57.7% 62.4% 63.7%

Mountain and Pacific Cities
 All Hotels 67.6% 70.7% 71.6%
 Full-Service 69.3% 72.6% 73.0%
 Limited-Service 64.5% 67.2% 69.1%

All Cities
 All Hotels 65.1% 67.3% 67.9%
 Full-Service 67.1% 69.3% 69.5%
 Limited-Service 62.1% 64.3% 65.5%

 Average Daily Rate

 2005 2006
 2004 Forecast Forecast

New England and Middle Atlantic Cities
 All Hotels $132.31 $143.30 $148.11
 Full-Service $151.09 $163.58 $169.84
 Limited-Service $88.12 $94.84 $97.22

North Central Cities
 All Hotels $83.49 $87.83 $89.99
 Full-Service $104.45 $110.24 $113.20
 Limited-Service $58.18 $60.80 $61.83

South Atlantic Cities
 All Hotels $94.46 $102.95 $104.22
 Full-Service $115.38 $125.54 $126.73
 Limited-Service $58.65 $63.90 $65.99

South Central Cities
 All Hotels $77.24 $80.60 $83.12
 Full-Service $100.47 $105.30 $108.72
 Limited-Service $52.75 $55.37 $57.55

Mountain and Pacific Cities
 All Hotels $100.95 $109.37 $114.92
 Full-Service $120.45 $130.70 $138.33
 Limited-Service $64.25 $68.87 $71.35

All Cities
 All Hotels $97.80 $105.16 $108.42
 Full-Service $119.74 $129.07 $133.46
 Limited-Service $62.49 $66.73 $68.76

Sources: Smith Travel Research, Torto Wheaton Research, PKF Hospitality
Research (Winter 2006 Hotel Outlook Forecast)

HOTEL REAL ESTATE SALES--TRANSACTION ACTIVITY
First Nine Months 2005

 Median Sale
 Number of Median # Median Price Per
 Transactions of Rooms Age Room

All Hotels 625 108 21 $54,688

Region
 New England/Mid- 79 136 25 $83,333
 Atlantic
 North Central 64 120 18 $42,164
 South Atlantic 200 119 22 $51,115
 South Central 39 135 15 $38,014
 Mountain/Pacific 243 81 21 $58,394

Property Type
 Full-Service 235 189 29 $74,194
 Limited-Service 309 71 20 $43,349
 Extended Stay 52 112 7 $68,025
 All-Suite 29 128 9 $79,960

Affiliation
 Yes 447 121 19 $53,197
 No 178 60 43 $58,573

Size of Property
 Over 226 Rooms 106 352 25 $100,882
 151 to 225 Rooms 96 176 25 $44,066
 78 to 150 Rooms 228 108 18 $50,930
 0 to 75 Rooms 197 50 21 $52,381

Note: * Readers are advised that the transactions that occur during a
particular month may riot be publicly recorded for several months
in the future. Therefore, the number of transactions identified are
only those known as of the Quarterly Trends publication date.

** The data presented is intended to profile the transactions that have
occurred. It is not intended to be a measure of changes in
hotel values.

Sources: PKF Hospitality Research, CoStar Hotel Brokers Association
and Industry Media.

FIRST THREE QUARTERS 2005 vs 2004

 First Nine Months 2005

 Median Sale
 Number of Median # Median Price Per
 Transactions of Rooms Age Room

All Hotels 658 117 21 $37,725

Region
 New England/Mid- 48 132 27 $71,761
 Atlantic
 North Central 116 120 18 $25,169
 South Atlantic 192 122 21 $36,261
 South Central 75 112 20 $23,707
 Mountain/Pacific 227 97 25 $50,806

Property Type
 Full-Service 239 197 27 $54,527
 Limited-Service 373 79 20 $32,090
 Extended Stay 28 110 18 $38,189
 All-Suite 18 132 9 $62,620

Affiliation
 Yes 508 122 19 $35,491
 No 150 63 40 $44,128

Size of Property
 Over 226 Rooms 112 304 26 $57,532
 151 to 225 Rooms 89 180 25 $44,231
 78 to 150 Rooms 257 118 19 $29,851
 0 to 75 Rooms 200 51 21 $40,000
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Publication:Quarterly Trends in the Hotel Industry (USA)
Date:Dec 1, 2005
Words:1996
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