COMPETITION IN THE CITIES

Hotels in the nation’s major markets have historically achieved significant occupancy and average room rate (ADR) premiums compared to the typical property in the United States. Unfortunately for these superior performers, success has attracted competition. While “metro” hotels should continue their superior performance measures in the future, the pace of revenue growth may lag behind their country cousins.

Supply Suppresses Growth

PKF Hospitality Research (PKF-HR) is forecasting the supply of hotel rooms in the United States to grow 2.5 percent in 2008. As part of the overall growth in supply, the inventory of rooms in 50 of the largest cities in the nation is projected to increase by 3.1 percent. Nearly half (47.7%) of all new hotel rooms entering the U.S. lodging industry in 2008 will operate within these 50 major markets.

Fortunately for hotels in the country’s major markets, the demand for lodging accommodations is expected to increase 0.5 percent in 2008. While slight, this pace of demand growth compares favorably to the projected 0.1 percent decline in demand for the entire nation. Helping sustain hotel demand in the major markets is the influx of international inbound travelers to the nation’s gateway cities.

While both metro and non-metro properties are forecast to experience a 2.5 percent decline in occupancy during 2008, the increased competition within the urban areas will suppress ADR growth in the cities to just 3.9 percent. This is slightly less than the PKF-HR forecast of a national ADR increase of 4.1 percent for 2008.

Hurting In The Middle

Hotels in the nation’s midsection are the only lodgings forecast to achieve less than the 1.3 percent gain in RevPAR projected for all U.S. cities in 2008. For the year, PKF-HR is forecasting a 2.8 percent decline in RevPAR for the average property located in one of the major markets in the North Central region. Not only is this section of the nation projected to feel the impact of a 3.3 percent increase in supply, but weak economies in these industrial cities are forecast to result in a 0.7 percent decline in lodging demand.

Because of relatively low barriers to entry and prospects for favorable demand growth over the long term, the major cites located in the South Central region will experience the greatest percentage increase in hotel supply in 2008. Cities like San Antonio and Fort Worth are each seeing their lodging inventory grow in excess of 8.0 percent. Lodging markets in the South Central region, along with the South Atlantic, are forecast to achieve RevPAR increases of just 1.4 percent in 2008.

Compared to other areas of the country, hotel development activity along the west coast is relatively mild. Hotel room inventory in the Mountain and Pacific cites is projected to grow just 2.2 percent in 2008, the lowest supply growth rate of any region. With less new competition, hotels in this region are forecast to raise their room rates 4.1 percent for the year, the strongest regional increase in the nation.

Hotels in the New England/Middle Atlantic region are forecast to achieve the greatest increase in RevPAR in 2008. However, the projected 3.6 percent pace of RevPAR growth is a sharp fall off from the 10.9 percent increase enjoyed in 2007. Fortunately, properties in the major northeastern cities will still achieve an annual RevPAR ($141.28) more than double the overall national average ($66.47) forecast for 2008.

Know Your Market

The hotel business is like most industries in the United States. The impact on lodging demand from the current economic slowdown varies from location to location. The hotel industry has always been categorized as a “street corner business.” This adage is very applicable to market conditions in 2008.

For hotel owners, operators, and other interested parties to gain a better understanding of the future in their local lodging market, PKF-HR produces forecast reports each quarter entitled Hotel Horizons^SM for 50 of the largest hotel markets in the United States. Each of the 50 Hotel Horizons^SM reports present a five-year forecast of supply, demand, occupancy, ADR, and RevPAR for its respective market area. In addition to the forecast, each report contains historical hotel performance data from Smith Travel Research, local economic information from Moody’s Economy.com, and on-the-ground insights from the national consulting staff of PKF Consulting.

To learn more about Hotel Horizons^SM, please visit our website at www.pkfc.com/hotelhorizons, or call (866) 842-8754.