UNITED STATES The recovery of the U.S. lodging industry continues to improve, buoyed by sustained expansion in the demand for hotel rooms across the country. Accordingly, Colliers PKF Hospitality Research has edged up its forecasts for U.S. hotel performance for 2010 and reaffirmed its outlook for 2011.
In the recently released December 2010 edition of Hotel Horizons, PKF-HR forecasts that lodging demand will grow 7.8% in 2010, nearly four times greater than the 2% increase in hotel supply, resulting in a record 5.7% rise in occupancy.
In September, PKF-HR hotel forecast a 7.3% change in 2010 lodging demand. “Given the actual rise in demand reported by Smith Travel Research through the first three quarters of the year, along with a modest improvement to the economic forecast from Moody’s Analytics, we have increased our projection of annual demand growth to 7.8%,” says PKF-HR President R. Mark Woodworth.
As the firm anticipated, ADR growth turned positive in the third quarter, but ADR tends to lag the recovery in occupancy. “Despite the strong growth in demand, we are still forecasting a slight 0.1% decline in hotel ADR for 2010,” Woodworth says. The ADR drop, combined with the 5.7% increase in hotel occupancy, results in an annual RevPAR gain of 5.6% for the year—full percentage point better than the 4.6% RevPAR growth rate forecast in September.
The PKF-HR outlook for 2011 has also improved, albeit to a limited degree. The latest forecast calls for a 3.3% in demand, which will drive a 6.3% rise in hotel RevPAR next year. These are 0.1 and 0.3 percentage points, respectively, greater than the firm’s prior forecast.
“Severe room rate discounting during the first half of the year has driven the quicker-than-expected demand growth in 2010,” Woodworth says. “In 2011, managers should become more aggressive in raising their ADR. However, as we have been expecting for some time, pricing power will not fully return until 2012, when we expect to see a very attractive gain in RevPAR.” PKF-HR is forecasting RevPAR growth of 10.4% in 2012 and 10% in 2013. These represent the first time the national RevPAR has grown in excess of 10% since STR started reporting the statistic in 1987.”
Major-market hotel performance leads the recovery of the U.S. lodging industry in 2010. By year end, hotels in the 50 U.S. cities that comprise the PKF-HR Hotel Horizons universe should enjoy a 6.4% increase in RevPAR, 0.8 percentage points greater than the gain forecast for the overall U.S. lodging industry. Driving the major-market RevPAR growth premium is the strong 9.3% estimated gain in demand.
“There are several factors that have contributed to the robust growth in major-market hotel performance in 2010, not the least of which was a shift in group demand,” Woodworth says. “Most major cities are primary meetings destinations, and we know from our annual survey of meeting planners that they were avoiding these more expensive markets in 2008 and 2009. However, our 2010 survey of meeting planners found that the larger markets became more appealing because of low room rates. 2010 was the year in which urban markets represented significant value as a meeting destination.”
While the aggregate 2010 performance numbers for the 50 major markets look appealing, a dose of reality needs to be injected; removing New York City from the equation drops the RevPAR forecast from 6.4% to 5.4%. “New York’s ADR is forecast to rise 6.6% this year,” Woodworth says. “It is just one of the 10 markets that will enjoy an ADR increase in 2010.”
Looking toward 2011, the pace of RevPAR growth for the major-market sample is expected to slow somewhat. PKF-HR is forecasting RevPAR for this group to grow 5.6% next year, driven mostly by a relatively strong 4.1% increase in ADR. “The year-over-year comparisons, while still quite favorable, will appear somewhat less robust in 2011,” Woodworth says.
Concurrent with the improved outlook for revenue is growth of the bottom line. For 2010, PKF-HR is projecting that the average hotel in the U.S. will achieve a 5.6% increase in net operating income (NOI), representing a marked turnaround from the record 35.4% decline experienced in 2009. The pace of profit growth picks up in 2011, when PKF-HR is projecting a hotel NOI increase of 11.1%—a rate that is expected to rise by more than 15% in both 2012 and 2013.
“From an investor perspective, the sooner-than-expected increase in rooms revenue, along with the accelerated lift in NOI, is welcome news to everyone in the industry,” says John B. Corgel, professor of real estate at Cornell University’s School of Hotel Administration. “Hotel capitalization rate compression has been driven by a general decline in 5- to 10-year interest rates as much as REIT participation. The renewed growth of hotel NOIs will help offset a reversal in interest rate trends should it materialize, which will help keep capitalization rates in check.”