Planners, listen up. Hotels are looking at sluggish growth rates, given diminished demand in a market with increasing supply. But, they won’t be relinquishing the seller’s market mantle or lowering room rates anytime soon.
“When looking at 2008, we believe that U.S. hotel owners and operators will struggle to grow their revenues and profits, but market conditions will not be as damaging as we saw back in 1991 or 2001,” says Mark Woodworth, president of PKF Hospitality Research (PKF-HR), publishers of the March 2008 Hotel Horizons Report. Woodworth says hotel performance started strong in first quarter 2008, but will deteriorate as the year goes on, with the average national average occupancy rate expected to decline a full point to 62.2 percent in 2008.
One reason for declining occupancy rates is the rate of supply (a forecasted change of + 2.6 percent from 2007 to 2008) outpacing the rate of demand (a forecasted + .9 percent). “The pipeline for hotel development has swelled in recent years to extremely high levels, but the high cost of building materials and disciplined lending has limited the number of projects that actually made it to the construction stage,” Woodworth explains. “The increase in supply we are observing in 2008 and into 2009 is related to hotels begun prior to the onset of more restrictive lending practices.” PKF-HR predicts increased lending restrictions and commodities pricing will result in a lull in new supply openings from 2010 through 2012, which will drive the occupancy rate back up.
PKF-HR readjusted the RevPar forecasts it released last year from 4.5 percent to 3.0 percent growth (below the average long-term growth rate of 3.3 percent) in its March 2008 Hotel Horizons Report. The change reflects new data gathered from Moody’s Economy.com, its main economic forecasting agency, which predicts a U.S. recession in 2008 due to “deteriorating economic fundamentals,” such as soaring oil prices and turbulent market performance. The projected 3.0 percent RevPar growth for this year doesn’t cover the projected 3.5 percent increase in hotel operating expenses or the 2.7 percent projected rate of inflation for 2008, which means hotel room rates will continue to rise, at a projected 4.7 percent this year.
“From a market and financial perspective, we believe the U.S. lodging industry is in a healthier position entering this economic recession than prior recessions marked by sliding income and employment,” Woodworth concludes. “External factors such as inefficient tax legislation or lax underwriting standards have not spurred excessive new construction, and hoteliers in most markets have, and will continue to, benefit as a result. Therefore, we believe the underlying foundation for the solid market and operational conditions that exist in the industry today are steadfast enough to withstand this recession.”