How improving fundamentals make 2011 the year of great expectations for the hotel industry

How improving fundamentals make 2011 the year of great expectations for the hotel industry

At the ALIS conference last week, Smith Travel Research gave a great overview on the final results for 2010 as well as its outlook for 2011 and 2012. The numbers are very interesting! 

Jan Freitag made the presentation at ALIS. According to him, at the end of 2010, there were 52,000 hotels in the United States providing a total room supply of 1.7 billion rooms (a 2% increase in supply over 2009). 

Great increase in demand 

The demand for room nights grew a staggering 7.8%, returning to the pre-bubble peak of 1 billion room nights sold during 2010. But with an increased supply of hotel rooms taking a share of the demand, occupancy only increased 5.7% to 57.6%, below the magic 60% occupancy level. Smith Travel hailed the demand growth, but noted that it does not expect to see this outsized growth again in the foreseeable future. In fact, as noted below, demand growth for the next two years is projected to be below 2% per year.

Disappointing lack of any meaningful rate growth 

Unfortunately, the dramatic demand growth was not accompanied by a comparable increase in ADR. In 2010, ADR was flat (actually down 0.1%) at $98, and still below the important $100 level. RevPAR increased 5.5% to $56.50, and room revenues increased 7.6% to $99.5 billion. 

But 2011 and 2012 look to be years with strong ADR and RevPAR growth, as shown below.

Coastal markets hit harder, recovering faster 

While all markets have suffered and recovered on the demand side of the ledger, it is notable that the coastal markets have been hit harder and have recovered faster on ADR. The following charts demonstrate this point, with the red line showing the Boston-New York City-Miami-LA-San Francisco markets. 
Change in scale segmentation 

STR announced that they are updating their chain scale segmentation. They are dropping “Midscale with F&B” and “midscale without F&B.” The new segments will be called “Upper Midscale” and “Midscale.”
And here is how Smith Travel sees the future by chain scale segment:
As we have discussed many times, all hotels will not benefit or suffer equally. Chain scale segmentation is only one of the factors helpful in evaluating investment prospects, along with many other critical factors such as the specific geographic market the hotel is in and the size, nature, condition, branding and management of the property itself.

What lies ahead

For the total U.S. outlook, Smith Travel projects the following for 2011 and 2012:
What’s it all mean?

We continue to believe that 2011 will be a pivotal point in hotel investment with accelerating workouts, purchases, sales and financings. The worst is behind us. Fundamentals are improving. Liquidity is returning to the marketplace, and capital is poised for investment. This will be a busy year with strong increases in hotel values and performance.