ASSESSING THE ACCURACY OF RECENT HOTEL OUTLOOK FORECASTS

Gaining Confidence Using Econometric Forecasts

DRAFT SUMMARY REPORT - JANUARY 2005
MADE AVAILABLE FOR 2005 ALIS CONFERENCE

WHAT IS HOTEL OUTLOOK AND WHO PROUCES THE FORECASTS?

Hotel Outlook is a product offered to hotel capital suppliers, managers, and others with interests in hotel markets that presents to clients quarterly forecasts of average daily rate (ADR) and occupancy for six years. These forecasts of hotel room revenue (aka revenue per available room - RevPAR) result from combining (1) historical room revenue data assembled by Smith Travel Research (STR), (2) historical economic data from Economy.com, (3) forecasts of macroeconomic performance measures developed by Economy.com, and (4) a state-of-the-art econometric model that finds relationships between hotel market and economic performance and then generates predictions. With one exception noted later in this report, Hotel Outlook presents forecasts in an entirely objective manner. Current hotel market coverage is as follows: 

• United States Market - At this time, forecasts of hotel room revenues are produced for the U.S., but not for other nations. The U.S. hotel market is defined as 51 of the largest hotel markets in the nation.
• Two Market Segments - Hotel Outlook includes Full-Service and Limited-Service room revenue forecasts. These segments represent the two dominant business models in the hotel sector. Forecasting at finer market segment delineations requires highly specialized techniques and analysis because of the overlapping demand among market sub-segments (e.g., upscale and upper upscale sub-segments of the full-service segment).
• Metropolitan Statistical Area (MSA) Markets - Room revenue forecasts cover the 51 largest MSA hotel markets. Most of the focus of Hotel Outlook clients is on the financial performance of hotels located in the largest MSAs in the U.S., such as New York, Chicago, and Orlando. Because of the complex interactions between gaming and hotel businesses in Las Vegas and Atlantic City, room revenues in these MSAs are not forecast at this time.
• Affiliated Hotels - Room revenue forecasts are provided for hotels that STR defines as having either ownership by or a contractual relationship with a nationally recognized brand.
• Annual and Quarterly Forecasts - Hotel Outlook includes forecasts on both a quarterly and an annual basis for each market for six years into the future.

In summary, Hotel Outlook comes to clients online in a convenient EXCEL format at quarterly frequency and includes room revenue forecasts by quarter and by year for the upcoming six year period. These forecasts of room revenues for affiliated hotels cover each of 51 MSA markets and the sum of the room revenues in these markets which defines the U.S. market. Separate forecasts are provided for full-service, limited-service, and the combined total of these two market segments.

Profile of PKF Hospitality Research (www.pkfc.com)

Headquartered in Atlanta, PKF Hospitality Research is the research affiliate of PKF Consulting, the international consulting and real estate firm specializing in the hospitality industry. Along with PKF Consulting and the PKF Capital Markets Group, the company has offices in New York, Indianapolis, Philadelphia, Washington DC, Atlanta, Houston, Dallas, Los Angeles, and San Francisco.

Profile of Torto Wheaton Research (www.twr.com)

Boston-based Torto Wheaton Research, a wholly-owned subsidiary of CB Richard Ellis, is the premier provider of commercial real estate forecasting, analysis, and consulting services for office, industrial, retail, multi-housing, and hotel property types. The firm provides unrivaled market knowledge through a full suite of research products and specializes in commercial real estate risk management through strategic debt and equity consulting. Highly sophisticated and reliable forecasting models, along with proven analytical expertise, have earned the company international recognition.

HISTORICAL BACKGROUND

The motivations to begin offering econometric forecasts for U.S. hotel markets came from expressions of interest by subscribers to TWR's Outlook series covering other property types to have a companion product for hotels and from the unsatisfied demand for objective, MSA-level hotel market forecasts observed by PKF among its clients. Following the completion of initial modeling research by Wheaton and Rosoff (1998) and the acquisition of historical data from STR, PKF and TWR formed a joint venture late in 2000 to create Hotel Outlook. Further model development and testing occurred during the first eight months of 2001 culminating in the initial release of Hotel Outlook (Fall 2001 edition) on September 6, 2001. Following the catastrophic events of September 11, 2001, the Fall 2001 edition was recalled and subsequently re-released on September 28, 2001. As shown in Table 1, Hotel Outlook is in its 14th edition at the time of this report.

The second half of 2001 was an incredibly difficult time to forecast hotel market performance. The economic recession in the U.S. beginning in early 2001 impacted hotel demand by the summer of 2001. The unprecedented events of September 11, 2001 created fear of air travel never before experienced in the world. In addition, it became clear during early 2002 that the U.S. would mount a war effort in the Middle East of an unknown scale.

Economists at PKF and TWR produced various revisions of the Hotel Outlook econometric model for the Fall 2001 through the Summer 2003 editions to incorporate the effects of the following influences on hotel revenues:

• The timing of the decrease in hotel revenues following the decline in general economic activity. Hotel revenues historically react quickly to shifts in general economic conditions, but reactions do not occur instantaneously. Moreover, the effects of recessions are differentially experienced across MSA markets and hotel market segments.
• The initial impact on hotel occupancy and ADR in all markets from the fear-of-travel stigma introduced by the terrorist attacks of September 11, 2001.
• The dissipation rate of the initial fear-of-travel effect as the stigma wore off at varying rates across metropolitan markets and hotel market segments.
• The anticipated effects of the U.S. war effort prior to the Afghanistan initiative and Iraq War, the actual effects of these military actions, and the dissipation rates of hotel market impacts as these actions approached conclusions.

The confounding influ