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