In its “Annual U.S. Lodging Forecast,” PKF Consulting projected that, for major cities nationally, the average daily room rate (ADR) for hotels would reach $124.95 in 2001, up from the $120.93 ADR it is estimating for year-end 2000.  The national occupancy rate for major cities is expected to hit 71.8 percent in 2001, up from 71.4 percent estimated for year-end 2000.

“These numbers reflect a 3.6 percent increase in room rates for 2000 over 1999, and a 3.3 increase for 2001 over the current year.  It’s not the kind of growth we saw in the Post-Recession Nineties, but it’s significantly ahead of inflation and very healthy for the industry,” said John Fox, Senior Vice President and head of the New York office of PKF Consulting.

These projections appear in the September issue of the firm’s Quarterly Trends in the Hotel Industry, released today.  The “Annual Forecast” is based on data gathered from 46 major U.S. markets by PKF/C and HRG consultants.

Once again, New York City is projected to lead the nation in both average daily room rate and occupancy percentage for 2001.  According to the Trends report New York will achieve an average daily rate of $250.00, followed by Boston, at $212.00, and San Francisco at $179.60.

New York will also lead in occupancy for 2001, at 83 percent.

“New York City is effectively ‘sold out’ 250 nights a year,” Fox pointed out.

Other occupancy leaders are projected to be San Francisco, at 81 percent, and Boston, at 78 percent.  Close behind are resort markets Orlando and Honolulu, each at 77 percent.

At the other end of the scale, the lowest average daily room rate among the 46 cities in 2001 is projected for El Paso, TX, at $60.00.  Also near the bottom are Corpus Christi, TX and Baton Rouge, LA, both at $67.00

Lowest projected occupancies fall to Wichita, KS, at 60 percent and Knoxville, TN and Oklahoma City, each at 61 percent.

Of the 46 cities in the survey, two-thirds will experience increases in occupancy in 2001, while one-third will remain flat or experience decreases.
 
“At PKF Consulting, our mantra regarding the industry remains the same – ‘All Markets are Local,’” Fox emphasized. 

PKF/C attributes much of this localism to differences in local economies and to the ability of some markets to absorb the recent burst of supply that followed on the heels of a revitalized hotel industry that shook itself out of the doldrums beginning in 1993-94.

“Some markets are overbuilt, and others – like New York or San Francisco – could absorb a lot more than what is on their drawing boards the next few years,” Fox said.  “We’ve been hearing a number of pundits predicting a dire future for the hotel industry, saying that it’s just over the hill, but as long as the economy remains strong, the industry will continue to ride the crest of the wave.” 

A “Magical Mystery Tour” of Major Markets

PKF Consulting and Hospitality Research Group consultants have compiled the following reports from cities in which they have recently completed engagements.  Here are their views of the hotel industry from a local perspective – the basis for our reasoning that “the lodging industry will remain healthy into 2001.” 

The Southeast

To begin, we would do well to examine a phenomenon that is not purely hospitality, but hospitality-related.  This phenomenon should be a leading indicator of why we’re seeing such a high degree of upscale development, not only in the Southeast, but across the nation.

The Southeast is experiencing expanding interest in second home development  - in the Appalachians in eastern Tennessee, in western North Carolina and northern Georgia, and along the entire seacoast of the Carolinas and Georgia.  These areas are seeing rapid development of second homes and resort communities.  Myrtle Beach, South Carolina is one of these communities. So are Hilton Head, SC and Pigeon Forge, Gatlinburg, and Sevierville, TN.

The popularity of the mountains and the seashore is well-known and is continuing apace. Why? The booming economy, the aging of the so-called “baby-boomers,” many of whom are now in their peak earning years 40s and 50s and flush with stock market gains and a need to “get away from it all”  - all contribute to the explosion of second home development and timeshares, and the increasing popularity of resorts, both within 100 to 200 miles of metropolitan areas and elsewhere.

We’re seeing the same phenomenon on the West Coast.   Here, the Boomers are joined by the younger generation of “Dot-Comers” in driving up real estate prices in already pricey second-home destinations like Monterrey, the Wine Country, La Jolla, and Lake Tahoe. 

Atlanta
Atlanta is the economic engine of the southeast. Population grew in the Atlanta MSA by nearly 900,000 people in the 1990s. Hotel development burgeoned during those years, with a total increase in room supply during the 1990s of more than 27,200 guestrooms in over 250 hotel properties. 

The mid-2000 hotel inventory in the MSA is just about 600 hotels with over 83,400 rooms, the fourth largest hotel market in the country. By the end of 2001, another 500 to 600 rooms will be added, and plans for the years beyond 2001 indicate that growth of room supply will continue. The largest project currently on the books is a 600-room expansion of the Omni Hotel at CNN Center in downtown Atlanta, currently scheduled to be completed in mid-2003.  

The Georgia World Congress Center is currently undergoing a 450,000-square-foot expansion that will increase its total exhibit floor space to over 2.0 million square feet by mid-2002. This will ensure the continuing popularity of Atlanta as a major convention destination in the U.S.

The year 1999 was a record year for downtown Atlanta convention business. Convention hotels in downtown experienced an aggregate occupancy in 1999 of over 71 percent, the highest such level in the past 20 years. 2000 will not be as good, but advance bookings for 2001 indicate that it could well surpass 1999 as the best year ever. One of the big influences in the expansion of business in the Atlanta CBD is the increase in mid-market room supply in recent years, thus giving the CBD an inventory of mid-priced hotel rooms that had been missing.

The Buckhead area, on the northwest perimeter of Atlanta, continues to draw development for high-end hotels. Since upscale Buckhead hotels boast the highest occupancies and ADRs in the Atlanta area, this interest is understandable.  We fully expect to see an Intercontinental Hotel of about 400 to 425 rooms developed in the Buckhead business district by 2003 or 2004 at the latest.   

Plans are numerous for other luxury hotel developers to build their own 4- and 5-star hotels in the Buckhead area. However, the barriers to entry there are high, with current land values approaching the stratosphere. With current room rates in the high $100 to low $200 range, and occupancies in the mid to high 70 percent range, developers’ interests are probably supportable, if not all of the projects under consideration are completed.

Charlotte, NC
Again, convention centers are at the center of development planning for hotels.  Uptown Charlotte will benefit from the development of a 700-room Westin hotel adjacent to its convention center. This will greatly improve that city’s competitive position in the regional convention market, as the existing 2,500-room inventory of first-class hotel rooms with reasonable proximity to the convention center has limited the appeal of the city in attracting larger convention groups. Three hotels totaling 500 rooms are under construction in Uptown Charlotte. Other properties under consideration include two as-yet-unnamed hotels of 250 and 600 rooms. We doubt the viability of the 600-room hotel due to its proposed location at some distance from the core of the CBD and the convention center.

Tampa, FL
The Tampa CBD has benefited from the recent opening of a 713-room Marriott Hotel adjacent to its waterfront convention Center.  Despite the addition of nearly 1,000 rooms to the downtown market, in the last year occupancies in the downtown rose by nearly 11 percent to an aggregate 70 percent, the highest in many years. This shows the impact of an increase in supply to the city’s ability to generate new convention business, benefiting all hotels in the market. 

Naples, FL
Some places are impervious to Baby Boomers.  Naples, the high-end resort destination on the Gulf Coast of Florida about 155 miles south of Tampa recently imposed a moratorium on all future hotel development, since the recent increases in supply have scared off developers, at least in the near term. 

The Southwest

In Texas, the hotel industry appears to be holding up in spite of increases in inventory.  Except for Fort Worth, every major Texas metro area is experiencing increased occupancies over 1999.  This is somewhat surprising in Dallas, which has managed to absorb nearly 20,000 new hotel rooms in the last five years.

Dallas
Dallas did experience a drop in occupancy during this absorption period, from 72 percent in 1995 to 64.5 percent in 1999.  They are expected to increase slightly to 65 by the end of this year.  Demand will flatten in 2001, but we see Dallas occupancies increasing by no more than a point to 66 percent in 2001. One measure of impending softness is the convention business.  While conventions booked some 800,000 room nights in 2000, bookings for 2001 are on a slower pace, and thus far bookings for 2001 are barely above 300,000.

San Antonio
San Antonio has just completed the expansion of its Convention Center.  The center has nearly doubled its capacity from 240,000 to 440,000 square feet.  But the big news is not so much the size as the new design of the new part and the radical refurbishing of the old.  It used to be said that, with the Alamo, the River Walk, and the nearby Hill Country, San Antonio was an interesting enough tourist city that it could attract conventions in spite of its convention center.  Now it will be able to attract conventions because of the convention center.  The center is now designed so that the river flows through it, and for the first time, San Antonio will have a truly world-class Convention Center.

Austin
Austin continues to be a bright spot, in spite of what would be considered heavy hotel construction for a market its size.  It should be noted that Austin has fewer hotel rooms in total than Dallas has added in the last five years.

Nevertheless, Austin occupancies are expected to increase from 70 percent in 1999 to 73 percent in 2000, and then go to 75 percent in 2001.

Austin is growing so rapidly that it virtually joins with San Antonio, 50 miles down the Interstate.  The drivers of the Austin economy are State Capital politics, a major regional university, a burgeoning music and film production scene, and of course, high tech industries.  Like several other cities we’ll mention here today, the strength of Austin’s hotel business is influenced by the current strength of the country’s “dot-conomy.”

Houston
While Houston occupancies are expected to be up in 2000, reversing a two-year decline, average room rates are expected to decline this year from about $87.50 to  $86.00, negatively affecting RevPAR.  However, we project that average rates will increase by a dollar to $87.00 in 2001.

The “hot” market for Houston is the Central Business District, which has broken out of the 60s in occupancy percentage for the first time since PKF Consulting started watching the Houston market in the 1950s.  In 2000, the downtown area is expected to hit 72 percent occupancy, then drop to 71 percent in 2001.

Biggest news for Houston is the scheduled groundbreaking for a new 1200-room convention hotel downtown.  The hotel is planned to be completed in time for the 2004 Superbowl in Houston. The convention hotel will be developed by Hines and operated by Hilton. 

Houston continues to revive its downtown area with its convention center and its new baseball park, which just opened this year, in addition to downtown being a strong center for the arts, restaurant and clubs.  As with many cities – San Francisco, Pittsburgh, and New Orleans – adaptive reuse, especially for hotel buildings, is a key component to this revival.  The old Humble Oil Headquarters building has been totally readapted and opened this year as a 191-room Courtyard by Marriott, a 171-room Residence Inn, 82 leased apartments, and a parking garage.

We’re seeing this phenomenon more and more in downtowns around the country where, for a variety of reasons – financing, zoning, economic impact – it’s often cheaper and easier to retrofit an existing building as a hotel than it is to build one from the ground up.

Retrofitting is a solution that is part of the times.  During the downturn for the hotel industry in the late 80s and early 90s, no one was building full-service hotels.  The only thing flourishing was limited service.  Over the past few years, we’ve seen the pendulum swing back – we now have a glut of limited-service hotels (and their proliferation is reflected in the overall ROI to be found in that sector.)  Now everyone seems to want to put a new full-service hotel into the downtowns of every major city.

New Orleans
New Orleans continues to be a strong hotel city, largely on the strength of its being America’s Party City.  The reputation it’s gained from the French Quarter and Mardi Gras have made it a natural tourist draw, and it is also one of the strongest convention cities in the country.  Its occupancies continue to be very healthy, ranging in the 70s. 

New Orleans been able to maintain and even improve its occupancy recently while, at the same time, absorbing more than 1,000 new hotel rooms each year for the past several years.  The city will be able to absorb 2,000 new rooms this year, and at the same time, jump its occupancy rate from 73 percent last year to 76 percent this year.  After that, things will level off, although we’re projecting a slight increase to 77 percent for 2001.

The current strong economy has been especially good for New Orleans.  It’s expanded its convention center once again – putting it well over one million square feet.  And finally, its casino situation seems to be on track after some disastrous false starts.  The big downtown casino has been up and operating since October of last year under the Harrah’s banner.  

New Orleans looks to remain a strong market because its been hedging its bets.  Party City, yes.  Major Convention City, yes.  Casino City, yes, again.  But it’s also made a big push for the family visitor trade, as well.   The city has one of the country’s major zoos, the Louisiana Children’s Museum and Science center, and is about to open an insectorium – a zoo for bugs –which will be one of only two in the country. In addition, a new 140-acre, $100 million theme park, Jazzland, has just opened – and there are plans to build an adjacent hotel in Phase II of Jazzland’s development.

New construction abounds.  A Ritz-Carlton has just opened on Canal Street, one of about six major hotel projects to come to completion this year.

New Orleans is perhaps one of the best examples of a city whose hotel industry has turned to adaptive reuse of older buildings.  Most hotel development in New Orleans over the past decade has involved the refurbishing of older buildings – converting department stores, office buildings, and warehouses to hotels.  The joke is that New Orleans has run out of old buildings to convert.

West Coast

San Francisco
The old line is that everyone wants to have a hotel in San Francisco.  But the barriers to entry are extremely high, fueled in no small part by Byzantine politics, strong labor unions, and cutting-edge environmental activism. 

Nevertheless, after years of small additions to supply, San Francisco is experiencing a hotel building boom.  The city currently has 33,000 hotel rooms and if all projects now on line are completed, nearly 3,300 more rooms will be added by 2005.  According to out consultants, that 10 percent increase in supply will be absorbed “in a heartbeat.”

Driving the boom is a diversified economy, led by high tech industries in nearby Silicon Valley and Internet-related companies within the city’s own “Silicon Gulch.” 

Tourism remains San Francisco’s number one industry, and to capitalize on increased confidence by tourists, plans are afoot for development of a new recreational pier adjacent to fabled Fisherman’s Wharf.

Conventions have long been a major driver in San Francisco, and the city is currently adding another 300,000 square feet of meeting space to Moscone Center, bringing the total to nearly 1.3 million square feet.  This will make Moscone the largest Convention Center on the West Coast.  Like the new hotel supply, this additional space is expected to be absorbed immediately.

Just this year, the city has seen the opening of Pac Bell park, home of the Giants, which is drawing extremely well.  Also, San Francisco hosted the second annual X-games, and is being considered for the permanent home for this event.  Both these attractions bring excellent media coverage to the city and may make up for the probable lack of Superbowl team this year.

New hotel development includes a 360-room Omni being built into a rehabbed office building in the Financial District, a 277-room Four Seasons on Market Street, and the Bloomingdale’s project – a 464-room hotel the be included in a mixed-use project including an expanded Bloomingdale’s, cineplex theatre, and other retail.

Los Angeles
Los Angeles has seen some major revitalization over the past few years, which has led LA hotels out of a decade’s-worth of doldrums.  

The local economy is strong and unemployment is low.  Downtown is being revitalized, thanks to the success of the new Staples center, the new basketball and hockey venue.  Also under construction downtown is a new Roman Catholic Cathedral and the Walt Disney Concert Hall.

All this has led to renewed interest in downtown hotel development.  A major large-scale apartment development will open shortly in the nearby financial district.

On the West Side, the Getty Museum which opened two yars ago has gained an international reputation and has become a major draw.   LA, the city where the car is king, is now leaning to love public transportation, with a new subway system that finally links Downtown and Hollywood to the vast reaches of the San Fernando Valley.  

Hollywood itself is undergoing a major facelift, with the addition of a large retail and entertainment complex that will be the permanent home of the Academy Awards, scheduled to open in 2002.  This Trizec/Hahn development will also feature a Renaissance Hotel.

The Democratic National Convention in August was doubly good for the city.  One phenomenon we’ve noticed over the years is that big events like this sometimes scare away visitors in the weeks immediately preceding and following – as if non-convention goers want to give the event a wide berth.

Not only did LA not see such a phenomenon around the Democratic Convention, but Hotels in June posted a fabulous month.  We assume that many people who might have come to town in August simply rescheduled their visits for June.

Orange County
The expanded Anaheim Convention center has reopened and now totals 1.6 million square feet.   Conventions and visitors, which had been off for a while, due to tremendous construction projects in the area, are now returning.

Disney has announced the opening dates for its second Anaheim theme park, Disney’s California Adventure, along with its Grand California Hotel and retail center.  This 700-plus room hotel will be the first located inside a Disney park on the West Coast.

Disney seems to be riding high on the economy and plans to build a third theme park in Orange County, which would open between 2003 and 2010, so long as it wins approval from the requisite municipal boards and commissions.

Anticipating the opening of the California Adventure park, developers are constructing new hotels in Anaheim and Garden Grove, but difficulty in securing financing has scuttled other development plans, and the bulk of new rooms won’t enter the supply until 2001.

San Diego
San Diego has been the strongest hotel market in Southern California over the past few years.  Success should continue with the expansion of its Convention Center to 2.6 million square feet by next year.

Voters also approved construction of a new baseball stadium, with a surrounding retail and entertainment district, which would revitalize a neglected area.  Completion is expected by 2002.  Hoteliers are predicting an increase in room nights as a result, particularly since only a limited amount of new supply has gone up in the past two years.

The Northeast – BOSWASH

Philadelphia
Philadelphia hoteliers breathed sighs of relief  and contentment after hosting a successful Republican National Convention in August.  The sighs quickly became gulps of anxiety as we wait to see how the Philadelphia market supports all the recently added rooms in the post-convention months ahead.

Since 1997, in anticipation of the convention, 3,200 new rooms were added to the market, and increase of 48 percent over the existing rooms base, bringing the total to 8,800 rooms in the center city.  And more rooms are expected – over 1,000 (1,067) rooms are currently under construction or proposed, including a 350-room Hyatt and a 281-room Residence Inn, an adaptive re-use of a former Art Deco office building.

However, with all the new supply additions, occupancy dipped to about 72 percent in 1999 – and is expected to decline further to the mid- to low-60 percent range through 2001.  At that point, with no further supply additions and considering current bookings at the Convention Center, we expect occupancies to rebound to the high 60s in 2002 and low 70s thereafter.

Once again, the Convention Center is being looked to as the Knight on the White Horse.  Preliminary discussions are underway for expanding the Center, adding over 200,000 square feet of exhibit space.  The primary purpose of expansion would be to solidify Philadelphia’s competitive position as a convention site and enable more simultaneous events and/or reduce the amount of downtime between events.  The project is not yet funded, but there appears to be some momentum.

Washington, DC
The hotel market in our nation’s capital continues to perform at a high level.  Through mid-year 2000, both occupancy and rate are up over the same period in 1999 – occupancy up 3.8 percent and rate up 3.3 percent.

Occupancy is expected to slow in the second half of this year and end up around the 1999 level, as much of the political population will be campaigning around the country in preparation for the upcoming presidential election.  In essence what happens is that when the politicians are out of town, their visitors are out of town, too.

For 2001, the inauguration year, PKF Consulting is projecting occupancies of 73 percent and ADR of $151.50.  Percentagewise, these are increases greater than we’re projecting for the nation as a whole, and are typical for the District’s hotel sector, which has historically performed well in the first year of a new presidency.  Our interpretation is that when a new administration comes in, everyone flocks to Washington to see them.

The health of the hospitality industry in Washington, DC, lends itself to development opportunities, much of which is focused on the adaptive re-use of existing structures.   One of these is the conversion of the historic Yale Steam Laundry Building into a 430-unit hotel. 

This is a market that has shown its ability to absorb new supply.  Between 1995 and 1999, total annual supply of room nights increased at an annual rate of 1.4 percent, while total annual room night demand increase at 2.5 percent.  These trends illustrate that hotel rooms supply in the Washington, DC market has not yet reached its peak.

To this end, several projects have come online in 2000, or will come online within the next few years.  Two projects expected to be competed by the end of this year are a 300-room Hilton Garden Inn and a 300-room Ritz Carlton.

Once again, here is another city making a serious move to increase convention trade.  The new Washington Convention Center, scheduled to open in 2003, will be the largest municipal public works project ever built in the District.  In the past, the existing center lacked the requisite facilities to accommodate larger groups, even though the nation’s capital is viewed as a prime location for such events.  The new Center will offer a total of 2.1 million square feet of space, including a 760,000-square-foot ballroom, which will be the largest on the East Coast.  Obviously, Washington, DC hoteliers are salivating over the possibilities the new Center will provide for increased business.

Boston
Boston is a very strong market.   Even with all the negative publicity surrounding the “Big Dig” and it attendant traffic headaches, the Boston CVB reports that visitor volume will go up by two percent in 2000 – not an impressive growth rate, but good enough to remain healthy for hotels.  

International visitors make up only about 15 percent of the total, but they are projected to increase by 5 percent by the end of 2000.  Much of this can be attributed to the Boston’s aggressive marketing.  The city has a London office to help it snare group business.

Also, the Boston economy is strong – fueled by financial services, dot-coms, and high tech.  Office space is at a premium and begins to get rents like those in New York City.

Our projections for Boston hotels represent the second-highest rates and third-highest occupancies of an city in the US.  The year 2000 will see Boston surpass the $200 average daily room rate barrier.

All this is happening despite added supply.  In 1999, the city added 1,500 rooms, followed by 300 rooms this year. Projections for 2001 show the addition of 2,000-3000 more rooms.

The hot area of Boston is the South Boston Seaport District.  Here’s where the new Convention Center will open in 2003 with some 800,000 square feet and an 1,100-room hotel, if they can get it financed.  That area is also scheduled for more office and condo development, together with at least two additional hotels.

New York
Our projections for New York City for 2001 – with occupancy at over 83 percent and rates at $250 per night are the highest rates and occupancies in the US and, as far as rate is concerned, the highest ever achieved by New York City.

And all this in the midst of an increase in supply we haven’t seen in years.  After several years of no or limited addition to supply, we find 1,700 rooms added in 1999, and 4,000 rooms added in 2000.  By 2004, we’ll see the addition of yet another 3,000 rooms.

The joke about supply and demand being turned on its head certainly applies to New York City, as well as Boston and San Francisco.

In 1999, the NYCVB said New York City hosted 36.7 million visitors – and they estimate that will go up by 5 percent in 2000 to 38.4 million.  That figure may be low, in that for the first seven months of 2000, hotel room nights increased by more than 9 percent.  However, in fairness, it will be hard to increase numbers this Fall over what they were last Fall, since last year’s September-to-November occupancy was about 90 percent.

Whether domestic or international, business or tourist, visitation increases for New York City has been across the board.  However, tourist visitation – which the CVB says were up 15 percent in 1999 – accounts for much of the overall increase.

New York City has become not only an acceptable but a desirable place to visit for both tourists and business travelers.   The City is on a roll, so no wonder that a number of proposals are being floated around including bidding on the 2012 Olympics and increasing the size of the Javits Center.  However, our consultants feel that, unless there are even more rooms added than are now on the drawing board, New York City can’t accommodate many more conventions.

PKF Consulting is an international consulting and real estate firm specializing in the hospitality industry.  PKF Consulting, along with The Hospitality Research Group and hotel brokerage affiliate Hospitality Asset Advisors Incorporated are all wholly owned subsidiaries of Hospitality Asset Advisors International, a U.S. Corporation.  The firm has offices in New York, Boston, Philadelphia, Washington DC, Atlanta, Houston, Dallas, Los Angeles, San Francisco, and Singapore.