the first few months of 2010 unfolded it became clear that STR’s 2010
forecast was markedly too bearish. On the one hand we underestimated
the slowness with which the lingering supply additions would open, and
on the other hand it now seems clear that the transient room demand is
recovering faster than we first thought.
Through the end of 2009, supply increased by 3.2 percent, a relatively
high percentage change when compared with the long-term average of 2
percent. At the beginning of 2010, the STR/Dodge Construction Pipeline
database still showed a little more than 80,000 rooms under
construction. This number is roughly 100,000 rooms (and well over 50
percent) smaller than it was a year ago, so the pipeline is not
backfilling after projects open. Continued lack of financing and the
increase in perceived riskiness of hotel projects led to a sharp
decrease in investor interest and capital allocation. Undoubtedly, this
lack of access to capital will be felt for the foreseeable future—at
least into 2011. The majority of projects currently under construction
are expected to open in the next two years, and the growth rate of
supply is expected to be around 2.2 percent in 2010 and around 1
percent in 2011.
Demand for hotel rooms has sprung back to life after the abysmal demand
declines of 2008 and 2009. The charge is led by transient travelers,
and is fueled by expected higher corporate profits, a topping out of
the unemployment rate, and the overall sentiment that the recession is
Especially on the upper end of the market we have reported substantial
occupancy growth, which is even more remarkable because these segments
had to absorb the largest part of the new supply. There are now 5.5
percent more luxury hotels and 8.7 percent more upscale hotels in the
United States than there were in March 2009. At the same time,
occupancy through the first three months was up 10.6 percent in the
luxury segment and up 6.1 percent in the upscale segment, implying
strong demand growth from business and high-end leisure travelers.
The questions remains, however, whether or not the growth in the number
of travelers is really a “false positive”—in other words, if the demand
is not induced by the extreme rate cuts, such as -6.8 percent ADR
decline through March for luxury hotels that the industry inflicted
upon itself. For the total U.S. hotel industry we expect demand growth
to materialize in the 4.2 percent range. Combined with the supply
growth that was mentioned above, we forecast 2010 occupancy growth to
be around 1.9 percent.
Despite the sharp rebound in demand and the positive occupancy change
compared with 2009, we still expect that hotel operators will continue
to discount rates. Through March, the U.S. industry showed ADR
decreases of 4.3 percent, with the larger discounts occurring at luxury
(-6.8 percent) and upper upscale hotels (-7.3 percent). Our ADR
forecast for 2010 is an additional 2.3 percent lower and comes on the
heels of the 8.8 percent rate decline that we reported for 2009.
Jan D. Freitag is vice president of global travel at Smith Travel Research.
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