• Trends in the Hotel Industry / United States Cities / 1997 Second Quarter Results
• Annual Forecast for the Hotel Industry / United States Cities / Projections 1997 - 1998

Short of a national recession or global warfare, the factors that influence most hotels in the United States can be found within a short radius of the front desk. Local economics, road work, weather, and competition have a much greater effect on a property's performance than a merger between two hotel companies enacted on Wall Street.

While the news for the overall industry is certainly favorable, a closer examination of the numbers reveals that certain markets are in distress, while others continue to enjoy growth. 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 on a national basis.

For 1997, Growth Continues

The overall occupancy average for the cities surveyed in this quarterly report is estimated to increase from 73.1 percent in 1996 to 73.9 percent by year-end 1997; however, slightly more than half the cities surveyed will experience a decline, or remain flat, in occupancy for the year. For the majority of those markets projected to experience declining or stabilized occupancy rates, the primary reason is a surge in new hotel rooms. Other flat markets are simply in a down year in their convention cycle, or have already reached their maximum potential annual occupancy.

The growth patterns for average daily room rates appears to be a little more uniform across the nation. By the end of 1997, all but five markets are estimated to grow their room rates by at least the pace of inflation. However, it is difficult to pin one overriding reason for this strong growth pattern. Of the top 10 markets expected to achieve the greatest gains in average daily room rate, half are markets with occupancy rates in the 60s, while the other half are achieving occupancy levels greater than 80 percent. Once again, the individual factors that affect a local market's pricing capabilities are apparently local in nature. The ability of hotels in New Orleans to charge premium prices during the Super Bowl has lasted throughout the year. Conversely, Minneapolis hotels have enjoyed an 8.2 percent increase in occupancy, but have only been able to raise their room rates 3.7 percent on average.

For 1998, A Slowdown

The six-year trend of growth in occupancy for major U.S. cities is projected to end in 1998. The national average occupancy for the cities in our quarterly survey is projected to remain at 73.9 percent in 1998, the same level estimated for year-end 1997. Once again, local conditions vary from market to market. Of the 42 cities in our survey, 18 are projected to experience a decline in occupancy, 11 should see a rise in occupancy, and the remaining 13 cities are projected to remain even with their 1997 performance. Further exemplifying the diversity of business cycles across the nation is the fact that, of the 18 cities projected to decline in occupancy in 1998, only nine will be coming off a year of declining occupancy in 1997. On the other hand, only five markets are expected to experience two consecutive years of increasing occupancy rates.

For the fourth consecutive year, PKF Consulting is projecting the growth of average room rates to slow down from the preceding year. These projections were based on the assumption that increased competition, new economy properties, and consumer price sensitivity would eventually curtail the pace of rate growth. In each case, the actual rate growth achieved has not only surpassed our expectations, but has increased over the prior year's rate of growth as well. It is this strong growth in room rates that has been most beneficial to the recent record profitability of the industry.

For 1998, the average daily room rate for those hotels in our survey is projected to increase 5.8 percent, compared to the 7.2 percent growth rate estimated for 1997. While all 42 markets surveyed are projected to achieve an increase in their average daily room rate, only nine markets are expected to achieve rate increases in 1998 greater that those achieved in 1997. It should be noted that the rate of growth projected for 7 of these 9 markets is expected to be less than the 5.8 percent growth rate projected for the nationwide sample, implying that those who are on a continuing growth trend are rising at a relatively slow pace.

Beyond 1998, Look Local

On a national level, hotel development activity will increase, but it is still at a pace substantially less than the peak years of the 1980s. Individual markets will see periods of growth in supply surpassing growth in demand; however, the staggered patterns of local development should keep national occupancy levels relatively flat.

Therefore, as stated in our January 1997 edition of Trends, future market performance will be based primarily on outside factors that affect the demand for hotel rooms. These factors could be positive in nature, such as a major special event, the expansion of a convention center, or the opening of new technology or distribution facilities. On the other hand, an unforeseen natural disaster, social upheaval, or corporate shutdown could easily spoil favorable conditions for individual markets.

For 1998 and beyond, the hotel's automated inventory and yield management systems will be pitted once again against the price sensitivity of the traveling consumer and the increasing availability of hotel rooms. Rather than predict a winner of the overall war, it would be wise to observe the individual battles being fought in each market.

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