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Hotel industry rebound: slow now, accelerating in late 2003.

The Hospitality Research Group (HRG) and Torto Wheaton Research (TWR) have released the results of their Spring 2003 Hotel Outlook report that shows the U.S. lodging market will continue to struggle through most of 2003, but start the recovery process in the fourth quarter of 2003. This forecast is for chainaffiliated full and limited-service properties in over 50 of the largest metropolitan markets.

Supply Growth Slowest Since 1995

The forecasts reveal that chain-affiliated hotel supply is expected to increase by only 1.7 percent for 2003. As current projects come to market in the first three quarters of 2003, supply growth is anticipated to bottom out in the fourth quarter at 1.5 percent, the lowest quarter-over-quarter supply growth since 1995.

Demand Surge After War Clouds Part

The prospect of a war with Iraq creates great uncertainty in the lodging market, causing sluggish demand growth expectations for the first half of 2003, the likely time frame of war. However, as most economists predict, corrections are likely to occur in various markets after war fears dissipate. There may be a short delay after the Iraq war uncertainty moderates, but hotel room sales should experience a noticeable lift thereafter--perhaps as early as the third quarter of 2003.

Occupancy, ADR, and RevPAR

The interaction of stagnant supply growth and demand correction in the latter half of 2003 results in an occupancy forecast for chain-affiliated properties of 63.6 percent for 2003. This is a moderate increase from the 2002 occupancy of 61.5 percent, but far below the near 70.0 percent occupancies of the late 1990s and 2000. Occupancy for chain-affiliated hotels is expected to register even stronger increases in 2004 and 2005.

Branded hotel room rates finally stopped falling towards the end of 2002 and are expected to increase by a slight 1.4 percent in 2003. Moderate ADR growth is expected in the second half of 2003 and should be followed by strong room rate growth in 2004 and 2005, when nominal ADR is anticipated to exceed the year-end 2000 nominal ADR. However, real ADR is not expected to exceed 2000 levels until much later.

Revenue-Per-Available-Room (RevPAR) growth, a key industry performance measure, for the chain-affiliated hotel market is forecast to turn positive in 2003 and increase 4.7 percent by year-end, which is only slightly lower than the previous increase forecast by the HRG/TWR model. The bulk of this RevPAR growth should happen in the second half of 2003, as the first two quarters of the year are expected to register an average RevPAR increase of only 1.7 percent.

Forecasts Differ by Segment

The 2003 outlooks for the full and limited-service segments of the hotel market differ. The full-service segment is expected to experience moderate growth by the end of 2003 and strong growth through 2005. The recovery of the limited-service segment will be similarly strong, but is not expected to begin until 2004. RevPAR of branded limited-service properties is expected to remain virtually flat in 2003. The recovery of both segments will be due in large part to the tempering of new construction, which leads to limited supply growth expectations, as shown in the graph below.

During 2003, occupancy for the chain-affiliated full-service market is forecast to increase by 3.0 percentage points, while ADR is forecast to increase by less than 1.0 percent. The resulting near-term outlook for the chain-affiliated, full-service segment is RevPAR growth of 5.8 percent in 2003. The outlook for the branded limited-service market is slightly less optimistic, as occupancy is forecast to increase by a miniscule 0.1 percentage points, and ADR is forecast to remain more or less flat.

Quick Adjustment to Changes in the Economy

The HRG/TWR forecasting models also reveal that most movements in the general economy are reflected in the demand for chain-affiliated hotel rooms during the same quarter as they occur. As a result, hotels with brands should benefit by the end of 2003 from the economic growth spurt that generally occurs after fears of war end.

The updated forecasts take into account not only the effects from the economy, but also the negative impact of the remaining portion of the stigma effect imposed upon the air travel industry as a result of the September 11 terrorist attacks. Air travel stigma refers to the fear of injury and death from becoming involved in terrorist attacks and war, emotional disturbances associated with following new procedures for air travel, and reemerging fears of airplane safety stemming from the weakened financial position of the airlines. While this stigma effect has decreased, it seems to still hamper lodging demand to some extent.

The updated forecasts also take into account the potential effects of a war with Iraq Such effects have been measured econometrically for each market and segment, based on the Gulf War experience of 1991, and have been applied to the lodging demand forecasts for the 2nd quarter of 2003.
MAJOR U.S. HOTEL MARKETS
Annual Results--2001-2003 Forecast *
Regional Performance

 Occupancy

 2001 2002 2003 Forecast

New England/Mid-Atlantic
 All Hotels 67.4% 66.5% 68.8%
 Full-Serivce 68.1% 67.2% 70.4%
 Limited-Service 64.2% 63.3% 62.1%
North Central
 All Hotels 59.9% 58.7% 59.1%
 Full-Serivce 60.4% 60.3% 62.0%
 Limited-Service 59.2% 56.3% 54.6%
South Atlantic
 All Hotels 62.8% 61.3% 64.1%
 Full-Serivce 63.6% 63.0% 66.9%
 Limited-Service 61.5% 58.7% 59.7%
South Central
 All Hotels 61.1% 58.8% 61.3%
 Full-Serivce 61.8% 60.3% 63.0%
 Limited-Service 61.0% 56.7% 58.9%
Mountain/Pacific
 All Hotels 64.5% 63.5% 65.4%
 Full-Serivce 64.9% 64.7% 67.8%
 Limited-Service 63.3% 60.4% 59.3%
All Cities
 All Hotels 62.9% 61.5% 63.6%
 Full-Serivce 63.8% 63.2% 66.2%
 Limited-Service 61.2% 58.4% 58.5%

 A.D.R.

 2001 2002 2003 Forecast

New England/Mid-Atlantic
 All Hotels $136.65 $130.10 $133.35
 Full-Serivce $150.54 $143.26 $146.63
 Limited-Service $73.46 $71.55 $70.93
North Central
 All Hotels $88.69 $86.40 $86.83
 Full-Serivce $107.45 $103.42 $103.37
 Limited-Service $58.95 $58.36 $57.31
South Atlantic
 All Hotels $89.59 $87.84 $89.93
 Full-Serivce $110.43 $107.25 $109.35
 Limited-Service $55.74 $55.05 $55.43
South Central
 All Hotels $83.86 $83.28 $83.05
 Full-Serivce $106.52 $105.11 $104.52
 Limited-Service $52.58 $52.57 $52.62
Mountain/Pacific
 All Hotels $104.45 $99.01 $99.76
 Full-Serivce $121.16 $113.91 $113.99
 Limited-Service $60.59 $58.98 $58.74
All Cities
 All Hotels $98.24 $95.20 $96.50
 Full-Serivce $118.68 $113.90 $114.95
 Limited-Service $57.99 $57.27 $57.03

* = Spring 2003 Hotel Outlook Report

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

U.S. LOADING INDUSTRY FOURTH QUARTER 2002

 Fourth Quarter 2002

 Average Average
 Average Age Sale
 Number of Number (Years (Price
 Transactions Of Rooms Open) Per Room)

All Hotels 37 151 34 78111

Property Type
 Full-Service 18 239 32 117337
 Limited-Service 19 68 36 40949
 Extended-Stay -- -- -- --

Region
 New England/ 2 100 49 159766
 Mid-Atlantic
 North Central 5 214 18 88622
 South Atlantic 5 152 31 111112
 South Central 1 500 21 129828
 Mountain/Pacific 24 128 37 60086

Rate-Categories
 $50 or Less 10 10 39 35812
 $51 to $75 6 79 22 41094
 $76 to $100 9 186 34 71478
 $101 to $150 5 226 32 93364
 Greater than $150 7 211 39 167900

Affiliation
 Chain Affiliated 22 202 22 74281
 Independent 15 77 51 83128

Sources: The Hospitality Research Group, Costar, Hotel Brokers
Association and Industry Media.

TRANSACTION ACTIVITY

 Fourth Quarter 2002

 Average Average
 Average Age Sale
 Number of Number (Years (Price
 Transactions Of Rooms Open) Per Room)

All Hotels 171 100 33 46111

Property Type
 Full-Service 60 167 34 65207
 Limited-Service 110 64 33 35056
 Extended-Stay 1 96 3 116459

Region
 New England/ 15 138 25 63334
 Mid-Atlantic
 North Central 14 113 25 27257
 South Atlantic 52 92 36 41403
 South Central 13 135 19 28153
 Mountain/Pacific 78 91 37 52073

Rate-Categories
 $50 or Less 74 66 32 32538
 $51 to $75 48 103 32 33220
 $76 to $100 25 127 31 54393
 $101 to $150 19 152 40 89066
 Greater than $150 5 258 52 166114

Affiliation
 Chain Affiliated 82 129 23 40530
 Independent 89 74 43 51253
COPYRIGHT 2003 Pannell Kerr Forster
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2003 Gale, Cengage Learning. All rights reserved.

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Publication:Quarterly Trends in the Hotel Industry (USA)
Geographic Code:1USA
Date:Mar 1, 2003
Words:1416
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