Printer Friendly

Turnaround now--recovery, when?

The long-sought turnaround for the U.S. lodging industry occurred in the third quarter of 2003. In this quarter, chain-affiliated hotels in major U.S. cities posted a 1.6 percent increase in RevPAR over the third quarter of 2002. This increase in performance was solely attributable to a 2.5 percent increase in occupancy. Unfortunately, market softness continues to inhibit hotel management's ability to raise room rates. Average daily room rates (ADR) for the third quarter of 2003 were 0.9 percent less than they were during the third quarter of 2002.

Looking forward, The Hospitality Research Group of PKF Consulting (HRG), in conjunction with Torto Wheaton Research (TWR), is forecasting growth in RevPAR to continue through 2009. However, consistent with the recovery patterns of historical industry recessions, HRG/TWR foresees the early stages of the recovery to be driven mostly by increases in occupancy, with room rate growth following afterwards. HRG/TWR forecasts occupancy to improve 5.0 percent in 2004 along with a 2.5 percent increase in room rates. ADRs are not expected to exhibit significant growth above inflation until 2005.

Forecasts of an industry turnaround are welcome news for U.S. hotel owners and operators. HRG/TWR is forecasting RevPAR for the year 2003 to be 0.9 percent less than it was in 2002. This would be the third consecutive year of RevPAR declines. Despite a 0.5 percent improvement in occupancy in 2003, room rates in major U.S. cities are estimated to have dropped 1.4 percent for the year.

Full-Service Turnaround Stronger

For full-service hotels, the percentage growth in performance is projected to exceed that of limited-service hotels simply because full-service hotels have suffered deeper cuts in performance. From 2000 to 2003, full-service hotels experienced a 16.9 percent decline in RevPAR, compared to a drop of just 11.3 percent for limited-service properties. For 2004, HRG/TWR is forecasting an 8.1 percent increase in RevPAR for full-service hotels, while limited-service hotels are expected to achieve a 6.2 percent RevPAR growth rate.

The 2004 RevPAR improvement for both full-service and limited-service hotels will be influenced mostly by gains in occupancy. However, full-service hotels are expected to experience a greater benefit from rate growth compared to limited-service properties. Full-service ADRs are forecast to increase 2.9 percent, which will enable this segment to achieve an 8.1 percent increase in RevPAIR. On the other hand, limited-service ADRs are forecast to grow just 1.0 percent, resulting in a projected RevPAR growth rate of 6.2 percent.

Slower Growth In The Nation's Midsection

Over the years, HRG has stressed the need for hotel owners, operators, and analysts to look closely at local market conditions. Lodging demand patterns are strongly influenced by local economic conditions, as well as by local lodging supply patterns. Analyzing the forecasts of 2004 RevPAR for the different regions of the nation, we find much stronger growth projected for the East and West Coast regions, as opposed to the middle of the nation.

Hotels located in the major cities of the New England/Mid-Atlantic, SouthAtlantic, and Mountain/Pacific regions of the U.S. are all projected to benefit from a healthy 8.9 percent increase in RevPAR in 2004. Conversely, hotels in the South Central and North Central regions are forecast to improve their RevPARs by 5.4 and 4.6 percent respectively.

The main reason for the disparity in 2004 regional RevPAR projections is the difference in forecasts of regional ADR. All regions are expected to achieve occuppancy gains in excess of 4.0 percent for the year. However, East and West Coast hotel room rates are forecast to grow in excess of 3.0 percent, while South and North Central regional ADR growth is not expected to exceed 0.3 percent.

Recovery--What And When?

News of a turnaround in hotel industry performance is certainly welcome. However, most people want to know, "when will the hotel industry recover?" For many industry participants, recovery is defined as the moment hotels begin to perform like they did during the prosperous years prior to 2001.

To answer this frequently asked question, we analyzed our RevPAR projections for each of the 51 markets in our universe. We then identified the year that each market will achieve, or has achieved, its 2000 RevPAR mark. Please note that achieving 2000 performance levels is one definition of recovery that, like all other definitions, has its imperfections. In fact, given the effects of inflation, achieving 2000 performance levels in a subsequent year realistically places you behind in performance.

In 2000, the average RevPAR for all U.S. major hotel markets was $69.14. The HRG/-TWR forecast does not project this statistic to be reached again until 2007, when the average hotel RevPAR will be $71.74. Once again, lagging ADR growth suppresses a quicker pace of RevPAR recovery.

Of the 51 markets included in the HRG/ TWR forecast, five had already exceeded their 2000 RevPAR levels by year-end 2002. Another 20 are expected to surpass their 2000 RevPAR levels in 2004 and 2005. On the other end of the spectrum, five markets are not projected to achieve their 2000 RevPAR until sometime after 2009.

In general, the markets that "recovered" more quickly, or experienced no RevPAR decline in 2001, were smaller cities with relatively low ADRs (Albany, Omaha, Albuquerque). Conversely, cities such as Boston, New York, Chicago, and San Francisco are among those not expected to exceed their 2000 RevPAR until later on. It is the inability of these markets to achieve their lofty 2000 occupancy rates that inhibits them from exceeding their 2000 RevPAR levels.

Top Line First, Bottom Line Later

While it all begins "at the top", hotel owners, lenders, and to some degree managers, will not see benefit from the turnaround until hotel profits grow. Based on historical patterns, hotels are most profitable when ADRs are growing in excess of the pace of inflation. Therefore, the near-term turnaround in revenues should stem the tide of declining profits. However, significant profit growth may not occur until 2005 or beyond.

Barring unforeseen calamities, participants in the U.S. lodging industry should view 2004 as the first phase of the recovery cycle. By year-end 2004, the industry should post a strong increase in RevPAR, along with modest gains in profits. After the stress the industry has experienced in the past three years, it will be nice to operate in an environment of optimism.
MAJOR U.S. HOTEL MARKETS
Annual Results--2002-2004 Forecast *
Recional Performance

 Occupancy

 2002 2003 Forecast * 2004 Forecast *

New England/Mid-Atlantic
Cities
All Hotels 66.4% 66.0% 68.8%
Full-Service 67.1% 67.1% 70.3%
Limited-Service 63.3% 61.7% 62.9%

North Central Cities
All Hotels 58.6% 58.9% 61.4%
Full-Service 60.2% 60.8% 63.0%
Limited-Service 56.1% 56.0% 58.9%

South Atlantic Cities
All Hotels 61.3% 61.8% 65.2%
Full-Service 63.0% 64.0% 67.5%
Limited-Service 58.6% 58.5% 61.5%

South Central Cities
All Hotels 58.8% 58.1% 61.1%
Full-Service 60.6% 60.1% 62.9%
Limited-Service 56.5% 55.6% 58.5%

Mountain and Pacific Cities
All Hotels 63.4% 64.3% 67.8%
Full-Service 64.7% 65.8% 69.4%
Limited-Service 60.2% 60.4% 63.6%

All Cities
All Hotels 61.5% 61.8% 64.9%
Full-Service 63.2% 63.8% 67.0%
Limited-Service 58.3% 57.9% 60.9%

 Average Daily Rate

 2003 2004
 2002 Forecast * Forecast *

New England/Mid-Atlantic
Cities
All Hotels $ 130.36 $ 125.29 $ 130.90
Full-Service $ 143.42 $ 137.39 $ 143.90
Limited-Service $ 71.27 $ 70.54 $ 71.25

North Central Cities
All Hotels $ 86.38 $ 85.63 $ 85.90
Full-Service $ 102.65 $ 101.29 $ 101.94
Limited-Service $ 58.13 $ 57.80 $ 57.87

South Atlantic Cities
All Hotels $ 87.76 $ 87.51 $ 90.35
Full-Service $ 107.07 $ 106.43 $ 110.20
Limited-Service $ 54.73 $ 54.78 $ 55.90

South Central Cities
All Hotels $ 83.44 $ 81.02 $ 81.21
Full-Service $ 105.99 $ 101.94 $ 102.19
Limited-Service $ 52.16 $ 51.65 $ 51.50

Mountain and Pacific Cities
All Hotels $ 99.18 $ 98.51 $ 101.71
Full-Service $ 113.96 $ 112.97 $ 117.16
Limited-Service $ 58.78 $ 58.38 $ 59.16

All Cities
All Hotels $ 95.30 $ 93.94 $ 96.31
Full-Service $ 113.87 $ 111.69 $ 114.98
Limited-Service $ 56.99 $ 56.73 $ 57.27

* = Forecast as of Winter 2004

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

HOTEL REAL ESTATE SALES--TRANSACTION ACTIVITY

 First Three Quarters Of 2003
 Number of Median # Median Median Sale
 Transactions of Rooms Age Price Per Room

All Hotels 263 70 28 $ 38,306

Region
 New England/ 7 153 31 $ 47,917
 Mid-Atlantic
 North Central 31 99 25 $ 26,639
 South Atlantic 60 68 30 $ 39,428
 South Central 24 115 20 $ 24,539
 Mountain/Pacific 141 52 31 $ 40,476

Property Type
 Full-Service 46 153 29 $ 59,802
 Limited-Service 188 60 29 $ 37,810
 Extended Stay 13 65 31 $ 35,106
 All-Suite 16 134 16 $ 73,081

Affiliation
 Chain Affiliated 149 102 19 $ 38,095
 Independent 114 32 39 $ 39,650

Size of Property
 Over 226 Rooms 22 295 20 $ 73,485
 151 to 225 Rooms 22 175 23 $ 30,293
 76 to 150 Rooms 79 103 22 $ 35,132
 0 to 75 Rooms 140 39 35 $ 40,000

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
three quarters 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 charges in hotel
values.

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

FIRST NINE MONTHS OF 2003 VS FIRST NINE MONTHS OF 2002

 First Three Quarters Of 2002
 Number of Median # Median Median Sale
 Transactions of Rooms Age Price Per Room

All Hotels 591 69 30 $ 34,052

Region
 New England/ 61 91 29 $ 53,571
 Mid-Atlantic
 North Central 86 77 25 $ 26,261
 South Atlantic 180 74 33 $ 40,768
 South Central 57 103 17 $ 23,571
 Mountain/Pacific 207 50 35 $ 39,450

Property Type
 Full-Service 128 134 32 $ 45,586
 Limited-Service 414 55 30 $ 30,881
 Extended Stay 26 122 5 $ 49,707
 All-Suite 23 124 19 $ 65,000

Property Type
 Chain Affiliated 298 104 17 $ 30,609
 Independent 293 31 45 $ 40,000
Property Type
 Over 226 Rooms 36 351 30 $ 43,962
 151 to 225 Rooms 51 175 30 $ 26,531
 76 to 150 Rooms 187 109 18 $ 27,473
 0 to 75 Rooms 317 33 42 $ 38,667
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.

Article Details
Printer friendly Cite/link Email Feedback
Publication:Quarterly Trends in the Hotel Industry (USA)
Geographic Code:1USA
Date:Dec 1, 2003
Words:1804
Previous Article:Trends in the hotel industry United States cities--first half results for 2003.
Next Article:Better market--better assets.
Topics:


Related Articles
Midsized companies say recovery has begun.
The exciting challenge of property turn-arounds.
Chopra.
2002 Economic Turnaround Predicted. (Industry News).
Latin American demand to recover slightly this year.
Light at end of tunnel for UK technology.
From red to black: rebuilding wounded companies; When faced with declines or disasters, a struggling company can cease operations or it can choose to...
Corporate reputation takes years to recover: study.

Terms of use | Privacy policy | Copyright © 2020 Farlex, Inc. | Feedback | For webmasters