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by Patrick Quek

Looking towards 1998, we find local market conditions to be the most significant factors to analyze when projecting the performance of U.S. hotels.  While macro-economic factors certainly influence global and national travel patterns, the strength of the overall U.S. economy, and specifically the U.S. hospitality industry, has produced a national lodging picture that does not reflect the performance of most individual markets.  As an international firm with local offices, we monitor the industry not just on a global basis, but market-by-market, as well.  These days, you really need to evaluate the local market conditions in order to get the real picture of what' s happening in the hotel industry.

Each year, PKF Consulting projects the performance of hotels located in major U.S. cities.  The composite regional results for 1997 - 1998 are presented in following chart.
 
 
 

As most hotel managers will tell you, local economics, road repairs, weather, and competition have a much greater effect on their hotel' s performance than some merger between two hotel companies enacted on Wall Street.  You can tell a General Manager that the national occupancy level is going to increase, but that will mean nothing to him if four hotels are being built near his property and are going to drive his occupancy down next year.

The reason for the emphasis on local market conditions is the degree of variance from national performance patterns that is occurring in hotel markets across the country.   We consultants like to play with the big numbers and look at the overall health of the industry, but these statistics are just a composite of individual market performance data throughout the nation.  For instance, we are projecting a 1.1 percent increase in the occupancy level for major U.S. cities for year-end 1997 to the highest level in 17 years.  However, over half of the cities we survey are projected to achieve an occupancy level equal to or less than the occupancy they achieved in 1996.

This pattern of diverse market performance is expected to continue into 1998.  PKF Consulting projects the occupancy for the cities that it surveys to remain at 73.9 percent for both 1997 and 1998.  However, of the 42 cities included in PKF Consulting' s survey, 11 are projected to improve their occupancies in 1998, while 18 should experience a decline, with the remaining 13 staying flat.

While Occupancies Vary, Rate Growth Is Consistent

Unlike the different growth patterns of occupancy seen across the nation, almost all markets are experiencing strong growth in the average rate paid for a hotel room.  Starting in 1996, U.S. hotels have been able to raise the rates charged for their rooms at a pace twice the rate of inflation.  This strong growth has continued in 1997 when rates are expected to increase by 7.2 percent over 1996.  The average room rate is projected to grow another 5.8 percent in 1998.

While increased hotel development has caused declining occupancies for several cities, the increased competition has yet to show a dampening affect on the prices charged by hotel managers.  Only New Orleans and San Antonio will not be able to raise their room rates in excess of inflation in 1998.
 
 

The increased use of revenue and yield management systems by hotels has helped them to maximize the prices they charge for their rooms.  A recent  Sales & Marketing survey by PKF Consulting shows that nearly 80 percent of the hotels in the U.S. have some form of automated yield management system in place.  Yield management systems allow hotels to measure the demand for hotels and maximize the rates they charge when the rooms are wanted the most.  Unless people are flexible with their travel schedules, it will still be difficult to find a discounted rate in most markets.

Out Of Sync, And Loving It

Like other businesses, the hotel industry runs in cycles.  What we are observing at this time are individual hotel markets following traditional cyclical economic patterns; however, these cycles are not in sync nationally.

Hotel development activity will increase, but measured on a national basis, it is still less than the peak years of the 1980s.  Individual markets will see periods of growth in supply surpassing growth in demand.  Within major market areas, you will also see pockets of price wars as the competition heats up.  However, the staggered patterns of local development should keep the overall national picture for the U.S. lodging industry healthy through the year 2000.

Patrick Quek is president/CEO of PKF Consulting

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