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Conditional optimism runs rampant: U.S. hotels look forward to 2004.

Doing better than bad is not the most desired measure of success. However, for U.S. hotels, any performance measurement with a plus sign in front of it is welcome news. After two years of declining occupancy, The Hospitality Research Group of PKF Consulting (HRG) and Torto Wheaton Research (TWR) are projecting that the occupancy for chain-affiliated hotels in major U.S. cities will increase 0.7 percentage points in 2003 compared to 2002. This is the first sign of an industry recovery that has begun during the second half of 2003.

Unfortunately, HRG/TWR are not as optimistic regarding the movement of average daily room rates (ADR). Despite the expected improvement in occupancy, average room rates are projected to decline another 1.5 percent in 2003, the third consecutive year of declining ADRs. Looking back at other lodging industry recoveries, we find it typical for the recovery in room rates to lag behind the turnaround in occupancy.

With the decline in ADR overriding the increase in occupancy, RevPAR is projected to drop 0.5 percent for the year. Given the combination of an increase in occupancy with a decrease in ADR driving the decline in RevPAR, HRG/TWR are projecting unit-level hotel profits to fall another 2.0 percent in 2003. This trend follows profit declines of 19.4 percent and 9.6 percent, respectively, in 2001 and 2002. Slight growth in "other" revenues, plus continued cost controls from management, are expected to temper the negative effects of falling rooms revenue.

Strong Improvement In 2004

HRG/TWR are projecting some strong growth in RevPAR for the next few years For 2004, RevPAR is forecast to grow 8.9 percent, followed by 6.4 percent in 2005 On the surface, these growth rates appear to be very strong. However, it should be noted that the industry experienced a RevPAR decline greater than 16 percent over the past three years.

Continuing the trend established in the second half of 2003, the main driver of the 2004 increase in RevPAR will be occupancy. Approximately two-thirds of the 2004 increase in RevPAR will be attributable to an increase in occupancy, as opposed to ADR. Based on historical patterns, an increase in RevPAR of this magnitude and make-up could result in double-digit percentage growth in operating profits.

Full-Service vs Limited-Service Hotels

Consistent with previous forecasts, the outlook for limited-service versus full-service hotels is somewhat different. In general, the recession for full-service hotels was quick and deep. Limited-service hotels did not experience quite as severe a decline in performance, but their recovery is expected to take a little longer.

For 2003, HRG/PKF are forecasting a 0.6 percent decline in RevPAR for full-service hotels. This is the result of a 1.4 percent increase in occupancy, which will be more than offset by a 2.0 percent decline in ADR Limited-service hotels, on the other hand, are expected to achieve only a slight increase (0.2 percent) in occupancy in 2003, while realizing a comparatively small decline (0.4 percent) in ADR.

Concerning the two property types, full-service properties are forecast to achieve stronger increases in RevPAR during 2004. Both full-service (5.5 percent) and limited-service (5.3 percent) hotels are projected to experience significant increases in occupancy. Nevertheless, only full-service hotel managers are expected to improve their ADR greater than the estimated pace of inflation. The HRG/ TWR forecast shows an increase in ADR of 3.7 percent for full-service hotels, compared to 1 4 percent for limited-service properties. Given the relative movements of occupancy and ADR, look for full-service hotels to achieve greater improvements in operating profits in 2004 compared to the increases experienced by limited-service properties.

The Sun Helps

While the US. lodging industry struggled through the first half of 2003, there were some patterns of relatively strong performance that could foreshadow the expected second-half recovery.

During the first six months of 2003, chain-affiliated hotels in major U.S. cities as a whole suffered a 1.9 percent decline in occupancy as well as a 1.8 percent decline in ADR. The net result was a 3.6 percent decline in RevPAR. All three of these measurements are greater than the declines observed during the first quarter of 2003 This implies that the fall-off in performance was greater in the second quarter as compared to the first quarter. Clearly, the war and continuing occupation of Iraq suppressed all forms of domestic travel, as well as inbound international travel.

While the overall HRG/TWR sample experienced a 3.6 percent decline in RevPAR during the first half of 2003, it should be noted that 13 of the 51 markets tracked enjoyed growth in RevPAR compared to the first six months of 2002. Further observation reveals that most of these markets are located in warm weather climates and traditionally experience "peak season" boosts from tourists during the first half of the year. This is further indication that the leisure market segment has held up relatively well since 2001. As more markets experience their summer boost from leisure travel, the expected recovery of occupancy during the second half of 2003 will solidify.

Caution

Because of the abundance of non-economic factors (terrorism, war, SARS) that have had a negative influence on lodging demand since 2001, previous forecasts of lodging industry recovery have not come to fruition during the past two years. Therefore, even though all the fundamentals point towards strong RevPAR growth in 2004, skepticism still exists in the minds of many hoteliers Managers are optimistic that business will get better, but worry that unforeseen events will disrupt the turnaround that has begun.

If 20/20 hindsight can influence forward-looking attitudes, nervous hoteliers should weigh the positive data that points towards a continued recovery. Annual RevPAR projections of 8.9 percent and 6.4 percent might seem strong, but they have been achieved before. In addition, we have never seen markets experience the double-digit declines in RevPAR that were seen in 2001 and 2002.

Starting from the bottom of the business cycle as we are now, strong growth might not produce occupancy and ADR statistics sufficient to achieve the profit levels realized in 2000. However, the upturn in revenues following the severe declines of the past two years might quickly produce bottom-line profit increases that surpass long-term averages.
MAJOR U.S. HOTEL MARKETS
Annual Results--2001-2003 Forecast *
Regional Performance

 Occupancy

 2001 2002 2003 Forecast *

New Enaland/Mid-Atlantic
All Hotels 67.4% 66.4% 66.6%
Full-Service 68.1% 67.1% 67.6%
Limited Service 64.2% 63.2% 62.1%

North Central Cities
All Hotels 59.9% 58.7% 59.3%
Full-Service 60.4% 60.3% 61.2%
Limited Service 59.1% 56.2% 56.3%

South Atlantic Cities
All Hotels 62.8% 61.3% 62.2%
Full-Service 63.6% 63.0% 64.4%
Limited Service 61.5% 58.7% 58.7%

South Central Cities
All Hotels 61.0% 58.8% 59.2%
Full-Service 61.8% 60.4% 61.0%
Limited Service 60.1% 56.6% 56.9%

Mountain and Pacific Cities
All Hotels 64.5% 63.4% 64.1%
Full-Service 64.9% 64.7% 65.5%
Limited Service 63.4% 60.3% 60.6%

All Cities
All Hotels 62.9% 61.6% 62.2%
Full-Service 63.8% 63.2% 64.1%
Limited Service 61.2% 58.3% 58.4%

 Average Daily Rate

 2001 2002 2003 Forecast *

New Enaland/Mid-Atlantic
All Hotels $136.61 $130.05 $125.15
Full-Service $150.42 $143.11 $137.33
Limited Service $73.10 $71.28 $70.15

North Central Cities
All Hotels $88.67 $86.40 $85.81
Full-Service $107.33 $103.30 $102.03
Limited Service $58.76 $58.10 $57.61

South Atlantic Cities
All Hotels $89.51 $87.76 $87.73
Full-Service $110.22 $107.06 $106.67
Limited Service $55.56 $54.76 $54.84

South Central Cities
All Hotels $83.87 $83.33 $81.20
Full-Service $106.47 $105.06 $101.47
Limited Service $52.30 $52.25 $52.04

Mountain and Pacific Cities
All Hotels $104.41 $99.02 $97.60
Full-Service $121.04 $113.77 $111.80
Limited Service $60.52 $58.76 $58.43

All Cities
All Hotels $98.20 $95.18 $93.77
Full-Service $118.53 $113.75 $111.46
Limited Service $57.80 $57.00 $56.74

* = Forecast as of Fall 2003

Sources: Smith Travel Research, Torto Wheaton Research, Hospitality
Research Group of PKF Consulting

HOTEL REAL ESTATE SALES--FIRST HALF 2003 VS FIRST HALF 2002 TRANSACTION
ACTIVITY

 First Half 2003

 Average Average Sale
 Number of # of Average Price
 Transactions * Rooms Age Per Room **

All Hotels 248 76 35 $56,576

Region
 New England/ 8 54 65 $78,598
 Mid-Atlantic
 North Central 27 117 29 $42,545
 South Atlantic 58 77 34 $56,220
 South Central 18 139 20 $57,233
 Mountain/Pacific 137 60 37 $60,774

Property Type
 Full-Service 43 129 35 $76,151
 Limited-Service 183 57 37 $38,353
 Extended-Stay 22 128 17 $85,620

Affiliation
 Chain Affiliated 138 102 26 $54,657
 Independent 110 43 46 $62,260

Size of Property
 Over 226 Rooms 13 311 25 $92,543
 151 to 225 Rooms 17 180 22 $54,290
 76 to 150 Rooms 61 105 26 $38,679
 0 to 75 Rooms 157 34 40 $52,128

 First Half 2002

 Average Average Sale
 Number of # of Average Price
 Transactions * Rooms Age Per Room **

All Hotels 417 92 32 $58,700

Region
 New England/ 46 137 40 $128,637
 Mid-Atlantic
 North Central 65 85 24 $26,103
 South Atlantic 115 81 33 $48,284
 South Central 41 108 19 $24,458
 Mountain/Pacific 150 85 38 $57,628

Property Type
 Full-Service 80 179 35 $92,053
 Limited-Service 298 66 33 $32,720
 Extended-Stay 39 109 21 $66,170

Affiliation
 Chain Affiliated 211 129 18 $58,221
 Independent 206 54 47 $59,881

Size of Property
 Over 226 Rooms 24 399 27 $96,010
 151 to 225 Rooms 35 176 28 $63,317
 76 to 150 Rooms 136 108 21 $40,779
 0 to 75 Rooms 222 35 41 $43,087

Note: * Readers are advised that the transactions that occur during a
particular month may not be publicly recorded for several months in the
future. Therefore, the number of transactions identified for the first
half of 2003 are incomplete as of the Quarterly Trends publication
date.

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

Sources: The Hospitality Research Group, CoStar, Hotel Brokers
Association and Industry Media.
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Publication:Quarterly Trends in the Hotel Industry (USA)
Geographic Code:1USA
Date:Sep 1, 2003
Words:1763
Previous Article:Trends in the hotel industry: United States cities--first quarter results 2003.
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