According to PKF Hospitality Research LLC, the U.S. lodging industry continues the extremely healthy upward trend it began in 2Q10, with ongoing gains in all the major business measurements: lodging demand, occupancy,average daily rate (ADR), and revenue per available room (RevPAR). Looking forward, the company is forecasting a perpetuation of this growth through 2016. According to the recently released December 2012 edition of Hotel Horizons, RevPAR for U.S. hotels is projected to grow at a compound annual average rate of 7.2 percent for the next four years. This is more than double the historical long-run average.
But while the overall outlook is positive, the impact of the fiscal cliff could hamper progress in 2013.
“Despite all these positives, there is a pall on lodging industry participants induced by the federal budget negotiations,” said R. Mark Woodworth, president of PKF-HR. “Hoteliers are eager to begin enjoying what appears to be a four year period of sustained high levels of prosperity. Unfortunately, there is so much uncertainty surrounding 2013 that almost no one overtly is showing the optimism that should exist.”
The Hotel Horizons forecasts are based on historical lodging performance data from Smith Travel Research (STR) and Moody’s Analytics’ economic forecasts. Moody’s provides PKF-HR with multiple economic forecast scenarios. The Moody’s “expected case” economic forecast that drives the December 2012 lodging projections of PKF-HR assumes a resolution to the budget negotiations.
“Without falling off the fiscal cliff, we believe RevPAR in 2013 will increase by 6.0 percent. However, if budget negotiations fail, it can be assumed that RevPAR growth will be well below that,” said Woodworth. “The good news is that under most every economic scenario, 2014 is shaping up to be a year of strong gains in both occupancy and ADR. Beyond 2014, without any meaningful new supply additions in sight, we should see record profitability.”
Room Rates Rise
By year-end 2013, PKF-HR is forecasting the national occupancy rate to be 62.1 percent. While this is below the pre-recession peak of 63.1 percent, it does surpass the long-run average occupancy level of 61.9 percent per STR. “From previous research, we know that once occupancy reaches this important milestone, hotel managers gain the leverage they need to be more aggressive with pricing. Over the next four years, we are forecasting ADR growth of 5.4 percent on a compound annual basis,” said Woodworth.
Much of the gains in ADR will be experienced by properties in the luxury, upper-upscale, and upscale chain segments. Occupancy levels for these properties are projected to remain above 70 percent through 2016.
Properties in the upper-tier chain scales have led the recovery, but going forward PKF-HR is projecting the demand for more moderate-priced hotels to pick up. “This is consistent with the changes we have observed in the economic factors that have the greatest impact on lodging performance,” said John B. Corgel, PhD., the Robert C. Baker professor of real estate at the Cornell University School of Hotel Administration and senior advisor to PKF-HR. “The initial stages of the recovery were influenced by growth in personal income, which favors the generation of demand for higher-priced hotels. Now we are starting to see slight improvements in employment, the economic variable that stimulates greater levels of demand for lower-priced accommodations.”
With roughly 85 percent of future RevPAR growth driven by increases in ADR, PKF-HR is forecasting unit-level net operating income to grow at a compound annual rate of 10.0 percent through 2016. “We are in the middle of five consecutive years of double-digit gains in hotel profits, a streak not seen since the high inflation days of the 1970s,” Woodworth noted.
Local Market Performance Varies
The forecast also claims that ADR will increase for all 50 metropolitan areas in the Hotel Horizons universe during 2013. Conversely, for 20 of these markets, the annual occupancy rate is expected to decline. In seven of the 20 markets, the decline in occupancy can be attributed to a forecast drop in the number of rooms occupied. “On the surface, it is concerning that we are observing declines in demand. However, for cities like Oakland, Oahu, San Francisco, and Los Angeles, occupancy levels will surpass 70 percent. These cities are at a point in their respective business cycles where price hikes will deter demand. But that is OK, and potentially more profitable for most hotels,” said Woodworth.
As with its ADR predictions, PKF-HR is forecasting a 2013 RevPAR increase in all 50 markets. Among the 10 markets forecast to enjoy the greatest gains in RevPAR, five are located in Texas. On the other end of the spectrum, five of the 10 markets projected to achieve the least growth in RevPAR are cities experiencing relatively strong levels of levels in supply growth. On average, the room inventory in these ten cities will rise by 1.7 percent in 2013.
“It may take a few months into 2013 before we see the data that will get hotel owners and operators excited. Still, from our vantage, when we look beyond next year, we see one of the best times in history to invest in the U.S. lodging industry,” Woodworth concluded.
