| PKF 3rd Quarter 1997 Table |
Yes folks, as an international industry that spans the oceans, how could we think that the dominating forces behind EL NIÑO will not have an effect on hotels, as it has with everything else on the planet. As consultants to the industry for over 80 years, it’s the only thing we could think of.
Tides And Rates Rise
Through the first nine months of 1997, the pattern of limited gains in occupancy, combined with tremendous growth in room rates has remained true for major city hotel markets in the United States. The average occupancy for the 42 cities in our survey has grown 0.9 percent compared to the first nine months of 1996, while the average daily room rate grew a strong 7.8 percent.
As reported in our second quarter edition of Trends in the Hotel Industry, just looking at the national statistics does not tell the whole story. Two-thirds of the markets in our survey are experiencing a drop in occupancy through the third quarter of 1997. On the positive side, all but three of these markets were able to raise their room rates in excess of four percent, so the aggregate ADR gain for the declining markets was a healthy 6.5 percent. However, the loss in occupied rooms caused a drain in potential income, thus resulting in a somewhat moderate gain in REVPAR of 4.3 percent. This compares to a REVPAR gain of 11.1 percent for hotels in those cities are ahead in occupancy from 1996.
Hot Times For Summers In The Cities
Some call it global warming. We call it a health economy. In fact, in the April 1997 Travelometer survey conducted by the Travel Industry Association of America, leisure travelers cited visiting a city as the third most planned activity for the summer of 1997. Sixty-seven percent of all respondents stated that they intended to travel to an urban area for their vacation, behind in the poll only to visiting beaches/lakes (75%) and friends/relatives (69%).
The net result for hotels in the major U.S. cities was another summer of gains in performance spurred by a 2.5 percent increase in the demand for hotel rooms. These urban properties experienced a 0.7 percent increase in occupancy and 6.8 percent gain in ADR over the summer of 1996. While the upward trend is certainly good news for hoteliers, the pace of growth is slightly less than the growth experienced in 1996. The 7.5 percent gain in summer REVPAR for 1997 is less than the 10.9 percent gain in 1996, but greater than the 6.0 and 7.1 percent increases for 1995 and 1994 respectively.
South Heats Up While West Cools Off
In recent years, the South Central region of the U.S. has experienced the highest volume in new hotel development. Therefore, we have consistently seen declines in occupancy for most South Central cities, as well as the region as a whole. Through nine months, it appears that the winds of recovery have blown across the region. Through the first nine months of 1997, the occupancy for hotels in the region is up 0.4 percent. A slight gain, but a gain none the less.
Typically influenced by hurricanes from the Atlantic, the southeastern sector of the United States has not been immune from the effects of the Pacific-based EL NIÑO. Contrary to the typical pattern of low occupancy growth and high average daily rate growth, the winds have shifted business patterns in the southeast. Hotels in the South Atlantic region tied the North Central region for the greatest gain in occupancy; however, the southern hotels have only been able to raise their rates a relatively modest 5.9 percent.
One region recently experiencing continuous improvements in occupancy is the Mountain and Pacific States. However, just as the West Coast prepares for the onslaught of storms caused by EL NIÑO, the wave of new development activity deluging the mountain states appears to be hitting the coastal markets of Orange County, Portland, Seattle, and Waikiki. Through the first nine months of 1997, hotel occupancies in these cities are down from 1996, partially, if not entirely attributable to new hotel development.
Nor’East Rainmakers and Midwest Floods
Hotels in the urban markets of the northeast are the leading rainmakers in the nation. Despite occupancies in the eighties, hotels in Boston and New York are still showing improvement over their 1996 performance levels. Layer on top of the occupancy gain a staggering 11.0 percent growth in ADR and you get a regional gain in REVPAR of 12.8 percent, tops in the nation. With ADR growing at 11.0 percent, it can be assumed that the vast majority of the gains in revenue are dropping straight to the bottom line.
Meanwhile, the hotels in the nation’s breadbasket are also making hay while the sun is shining. Despite a surge in new hotel development in the rural areas of the midwest, hotels in the urban areas have shown a healthy 2.1 percent improvement in occupancy during 1997. With the help of a 9.0 percent gain in ADR, the North Central region of the nation achieved the second highest growth in REVPAR of 11.1 percent.
Investors Take Shelter In Hotels
With the impending storm approaching, real estate investors continue to flood the hotel market with cash. In a special survey of 65 key players in the hotel investment community, PKF Consulting asked respondents to measure their respective levels of involvement in 1998, as well as their favorite cities and property types for investment. The respondents included lenders, investors, operators, brokers, and developers.
For investors, brokers, and developers, 1998 is expected to be a year of growth, however, at a slower pace than in 1997. These expectations are consistent with the overall belief that the hotel industry is starting to stabilize. PKF Consulting is projecting that the occupancy level for the 42 major cities it surveys will remain constant at 73.9 percent for 1997 and 1998.
The one group that had a more outlook view towards 1998 were lenders. After experiencing a year of flat lending activity in 1997, the amount of hotel loans projected to close in 1998 is expected to increase somewhat over 1997. This is indicative of both an increase in the amount of capital available, as well as increased confidence in the fundamentals of the lodging industry.
Least optimistic on 1998 prospects are hotel operators. They are expecting a continuation of the difficulties they are currently experiencing in finding new management contracts. With more owner/operators purchasing hotels, it is difficult for independent management companies to find pure third-party management opportunities. An estimated 30 to 40 percent of management contracts written today require some form of equity or debt participation from the management company.
Riding Out The Storm In Luxury
Across the board, all respondents rank upscale and luxury hotels as highly favorable. Due to the high cost of purchasing or developing hotels of this caliber, upscale hotels enjoy a relative degree of insulation from new competition. Industry watchers believe these properties will continue to precipitate high occupancies, as well as significant growth in room rates and profits, making this a desirable segment in which to operate, invest, and own.
On the other end of the spectrum, economy limited-service properties ranked at the low end for all respondents. With all the new development activity occurring in this segment, lenders, investors, and operators fear that the market is becoming too crowded, therefore limiting the current and future potential performance of these properties. In 1996, limited-service properties experienced the slowest growth in ADR, REVPAR, and operating profits, compounded by a decline in occupancy.
Greeting The Storm Head On
Despite the ferocious effect EL NIÑO is expected to have on the oceans of the world, the coastal gateway cities of San Francisco, New York, Boston, and Seattle rank at the top of the most favored cities among all players in the hotel real estate and financial community. It is not surprising that all these markets are expected to achieve occupancies in excess of 78 percent and average room rates greater than $100.
The common theme among those markets ranking as least favorable in the survey is the large amount of new hotel construction that has, or is projected to occur. Noting the location of those least favored cities, you can track the path that hotel development has taken across the regions of the U.S. Not only do South Central and Southeastern cities like San Antonio, Houston, and Atlanta appear near the bottom of the list, but we’re starting to see Midwestern cities such as Detroit, St. Louis, and Cleveland also ranking near the bottom of the list. This regional movement is consistent with both the relatively low costs associated with entering these market areas (land, construction, labor, etc.), as well as the timing of the recovery of these regions from the recession of the early 1990s.
In PKF Consulting’s forecast for 1998, the occupancy for hotels in the South Atlantic region is expected to remain flat. Meanwhile, hotels in the North and South Central regions of the nation are projected to experience a decline in occupancy.
With Common Sense, We Can Ride Out The Storm
When analyzing the responses received in the survey, few things deviate from what would be expected. What the survey has done is confirm some main themes that were thought to be true, but not documented. They are:
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