Optimistic Expectations

The STR hotel performance forecast for summer 2011 reveals several good developments in store for the overall industry. For forecasting purposes, we consider summer to encompass June, July, and August.

We expect room demand, which has continued its rebound over the last year and a half, to increase by an additional 2.5 percent this summer over the demand in summer 2010. In July of 2010 we reported that the total number of rooms sold was in excess of 100 million rooms, a definite milestone as it was the strongest monthly room demand number ever recorded. We expect that this record will at least be matched this year as Americans take to the highways, railways, and skies in search of summer fun at the beach and elsewhere.

The extremely limited additions to existing room supply, coupled with the aforementioned demand increase, will benefit the U.S. hotel industry this summer as occupancies are expected to increase by 1.7 percent from last summer to around 66.7 percent. The new hotels expected to open in the coming months are mostly in the limited-service category of midscale and upper-midscale hotels. It seems that these properties are the few that can be financed, often by local developers with help of local banks and the requirement of large amounts of equity.

To date, room-rate growth has been a bit more sluggish than we had expected. Despite monthly demand increase in the high single digits starting in March 2010, ADR has only increased between 1 percent and 2 percent over the same period. Even the 3.8 percent increase in March was only due to a beneficial calendar shift of Easter to late April. For the three summer months, we forecast rates to go up by 4.1 percent to $103, slightly better than the year-to-date performance, but not yet enough to make up for the revenue declines of prior years.

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Our summer revenue-per-available-room forecast is $64.88, an increase of 5.9 percent from last summer. Because this increase is mostly rate driven, it bodes well for the bottom line of hotels and profitability will begin to rebound after several tough years. Some of this money will flow straight back to the properties in the form of property improvements and renovations, which were on hold for the last few years. Travelers and owners alike will benefit from refreshed properties, the former through better experiences and the latter hopefully through even stronger rate growth.

As with every forecast, certain macro-economic risks bring a level of uncertainty to our outlook. As discussed in this magazine and elsewhere, we do not expect that oil prices will have a noticeable effect on the summer travel season. It is, however, possible that consumers will trade down when it comes to their food or lodging choice if gas prices continue to increase. We expect that the room supply and demand numbers are fairly well understood and the wild card is and remains the ADR increase. Only if hoteliers trust the data that they obtain from us and other sources and indeed believe that demand is on a continued upswing will room rates continue to rise. A nationwide occupancy of over 60 percent is traditionally considered the signal of rapid, sustained ADR increases. And with nearly seven of 10 rooms occupied during this summer, hopefully the time for strong rate growth and profitability has arrived—and it is here to stay.

Jan D. Freitag is senior vice president of global development at Smith Travel Research.

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