NO SUNSET ON THE HORIZON - New Forecast Report From PKF Hospitality Research

PKF Hospitality Research (PKF-HR) is forecasting a slowdown in the pace of annual RevPAR growth for the next few years. By year-end 2007, U.S. hotels are forecast to achieve a RevPAR increase of 5.5 percent over 2006. This is the result of a slight rise in occupancy (0.1 percent) and a 5.4 percent boost to average room rates (ADR). For 2008, PKF-HR is forecasting U.S. national occupancy to be flat, with a 4.2 percent gain in both ADR and RevPAR. Compared to the last three years when RevPAR grew at an average annual rate of 8.0 percent, the 5.5 and 4.2 percent forecast growth rates are somewhat disappointing. However, it should be noted that, according to Smith Travel Research, the long-term (1989 – 2006) average annual growth rate for RevPAR is 3.1 percent, so the industry is projected to continue to perform “above average” this year and next.

These projections come from the inaugural issue of Hotel Horizons^SM, a new quarterly report produced by PKF-HR that contains a five-year econometric forecast of occupancy, ADR, RevPAR, supply, and demand for the U.S. lodging industry, six chain-scale segments, and 50 cities.

Chain Scales In 2007

Among the chain scale segments, Midscale hotels without food and beverage are forecast to achieve the greatest gains in RevPAR (6.5 percent) in 2007. Conversely, Economy (3.3 percent) and Midscale with Food and Beverage (2.2 percent) properties are projected to achieve the lowest growth in RevPAR for the year.

Historically, declines in the pace of RevPAR growth have frequently been influenced by surges in new supply. It is interesting to note that the two chain scale segments with the lowest forecast increase in RevPAR are also two segments that are projected to experience either a decline in supply in 2007 (Midscale with Food and Beverage), or just a slight increase in inventory (Economy).

On the other hand, Midscale hotels without Food and Beverage will see approximately 40,000 new rooms enter the competitive market in 2007, and still be able to boost RevPAR by 6.5 percent. We attribute this segment’s success to the popularity of brands among consumers, as well as the relatively low age of properties in this category.

Budgeting For 2008

In 2008, the U.S. lodging industry will begin to experience some impact from the buildup that has filled the hotel development pipeline the past few years. Due to the strong performance of the lodging industry, developers have desired to build new properties. However, high construction costs and land prices have helped to suppress the number of proposed projects that have actually broken ground.

PKF Hospitality Research is projecting a 3.5 percent increase in the supply of hotel rooms in the nation in 2008. The majority of development activity is occurring in the Upscale and Midscale without Food and Beverage segments.

This influx of new competition will contribute to moderate occupancy. PKF-HR is forecasting occupancy to remain at 63.4 percent in 2008, the same level achieved in 2007. Fortunately, with occupancy still above the long-term average, ADR is expected to continue to grow above the pace of inflation during the year. In 2008, PKF-HR is forecasting at 4.2 percent rise in average daily room rates. Therefore, RevPAR will also grow 4.2 percent in 2008. While RevPAR growth will be relatively modest compared to recent years, with ADR the dominant driver of revenue growth, unit-level profits are expected to continue to rise in 2008.

Tough ADR Growth

During the recent recovery period, U.S. hotel managers have clearly demonstrated their ability to raise room rates at two or more times the pace of inflation. This has been the driving force behind the double-digit annual gains in profitability that we have observed. Looking forward, PKF-HR is forecasting a more moderate pace of growth for average room rates within the U.S. From 2007 through 2011, PKF-HR is projecting an average annual growth rate of 3.8 percent.

Why won’t U.S. hotel room rates grow at the 5.0 to 6.0 percent pace observed during the later years of 1990s industry recovery, and during the past three years? The Firm offers several reasons why ADR will be somewhat suppressed the remainder of this decade.

• Economics – Both real personal income and nominal corporate profits are forecast by Moody’s Economy.com to grow at roughly half the annual pace achieved in the 1990s. This puts pressure on both personal and corporate travel budgets.
• Operations – During the 1990s, automated yield management programs helped hotel managers maximize their ADR compared to the relatively inefficient pricing practices of the industry up to that point in time. Most of the pricing inefficiencies have been worked out of the system. In addition, hotel management has learned how to properly price rooms sold through third-party intermediaries (agencies, websites, etc...) and have re-captured most of the leakage that was lost during the early 2000s.
• Market Conditions – PKF-HR is forecasting new supply additions to reach an annual rate in excess of 100,000 rooms from 2008 through 2011. While these totals are less then the levels of new supply that came on-line from 1997 through 2000, the effect of new competition cannot be ignored.

Given the turbulent economic environment, U.S. hotel owners and operators should welcome a forecast of modest and steady upward growth in revenues and profits for the next few years.

A New Forecast Report

PKF Hospitality Research is pleased to provide the U.S. lodging industry with a new source of performance projections. When developing the forecasting model used to prepare the data presented in our Hotel Horizons^SM report, we incorporated not only the most rigorous econometric methods, but the 80-year history of PKF’s knowledge of local market behavior as well.

Hotel Horizons^SM reports contain analyses of the historical and expected performance of the U.S. lodging markets. Each Horizons^SM report provides a five year forecast of supply, demand, occupancy, ADR, and RevPAR. The results of the Hotel Horizons^SM forecasts are published in quarterly reports for each of the 50 markets. In addition, a national Hotel Horizons^SM report is prepared on a quarterly basis that summarizes our outlook for the entire U.S. lodging industry, and provides insights into the performance of each of six chain-scale segments.

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