Wallets and bank accounts flew wide open in 1996, as hotel guests paid increasingly rising room rates and hotel companies purchased one another for millions of dollars. The end results were hefty profits for both hotel owners and investors. While a slowdown in market performance is anticipated for 1997, continued growth along the bottom line should continue to stimulate hotel investment activity.

Occupancies Fall Like Norman At Augusta

Like the fortunes of Greg Norman, 1996 was a year of mixed experiences for hotel operators. With hotel development activity on the rise, several markets in the United States experienced strong increases in the supply of hotel rooms. The majority of these markets were located in the Southeast, South Central, and Mountain States regions. While the number of new hotels opening in 1996 was significant, the number of rooms was not quite as dramatic. In fact, the average size of the new hotels that opened in 1996 was fewer than 100 rooms. The net result was a decline in occupancy for 24 of the 41 markets surveyed by PKF Consulting.

Despite the increased competition in these markets with declining occupancies, demand was sufficiently strong to raise room rates greater than inflation. The average room rate for all markets that experienced a decline in occupancy during 1996 grew 7.0 percent, not that much less than the 7.7 percent overall average rate growth for the nation.

Up Off The Canvas For Evander and Big City Hotels

For the major urban markets, 1996 was a knockout year. Relatively insulated from the construction activity seen in secondary and rural markets, hotels in the major urban lodging markets enjoyed a tremendous advantage in the balance of supply and demand. Strong economies generated increases in commercial, leisure, and convention travel to the majority of the nation’s most populous cities, while very few new accommodations came on line in these locations. The end result were record occupancy levels and double-digit increases in average room rates. The cities of New York, Boston, Philadelphia, Chicago, and San Francisco all achieved occupancies in excess of 75 percent while raising their room rates greater than 8.0 percent. Stories of complete market-wide sellouts were not uncommon in these markets. How many college roommates slept on your floor during 1996?

Looking at the projects in the pipeline and the length of time needed to develop and construct a large hotel in an urban market, it is safe to say that any significant changes to the lodging supply will not be seen for at least three years. Barring a prolonged economic recession, it looks like these markets should continue to enjoy these favorable conditions through the year 2000.

Like Michael Johnson, Hotel Profits Break Records

As in the story of the tortoise and the hare, there’s more than one way to run a race. Hotels experienced a variety of market conditions in 1996. Some hotels improved their occupancy, some lost. However, the one common experience for more than 80 percent of U.S. properties is that they made more money in 1996 than they did in 1995. Measured as a percent of revenue or in total dollars, preliminary data shows that U.S. hotels dropped more dollars to the bottom-line in 1996 than any time since PKF Consulting began tracking the industry in 1929.

In the earlier stages of the 1990s recovery, hotels primarily achieved their gains in profitability by controlling expenses, cutting services, and eliminating amenities. However, blessed with increases in REVPAR two to three times the pace of inflation, hotel management has been able to re-institute most of the previous cuts made in staffing, amenities, and services. This increase in expenditures is evidenced by the fact that hotel operating expenses, measured on a per available room basis, have grown in excess of CPI since 1994, after lagging behind for the prior four years.

What this means is that the industry is re-investing in its product. While a keen eye is watching to make sure the hotel maximizes its profitability, owners and operators are spending money on renovation, expansion, additional staffing, and practical amenities that not only attract guests to their properties, but justify rate premiums. After several years of dramatic losses, it is heartening to see that the industry is not simply hoarding its new-found profits, but wisely investing the money to sustain itself.

Ticker-Tape Falls On The Yankees And Hotels

With profitability returning to the industry, hotels were an attractive investment in 1996. During the year, we saw a continuation of the formation of lodging REITs and IPOs, as well as the purchase of large portfolios of hotels and entire ownership/management companies. On Wall Street, the Dow Jones group of lodging stocks grew a respectable 20.9 percent while hotel REITs as a grouping averaged 32.9 percent. These figures compare to the Dow Jones Industrial Average of 26.0 percent, the Standard & Poor’s Index of 20.3 percent, and the NASDAQ Composite average of 22.7 percent.

In what we deem a sign of future stability, the majority of investors and purchasers involved in the major transactions of 1996 have had previous experience in the hotel industry. In the past, by contrast, we saw non-hospitality investors intruding to make quick monetary plays in the lodging industry with little regard to the fundamentals of the business. Looking at all the recent investment in property renovations and expansions, we believe that the industry is currently in the hands of owners who are just as committed to the basics of guest accommodation as they are to their return on investment.

Our concern for the industry is always piqued by the structures of new ownership entities. Where we have seen the industry get into trouble in the past is when the various parties involved in the industry are working at cross purposes. Lessors and lessees, franchisers and franchisees, owners and management, lenders and developers - all have the opportunity to make money in today’s operating environment, which seems to be driven mainly by natural market forces. What the industry would do well to avoid is any artificial legislation or practice that unfairly benefits one party over the other.

The market and financial fundamentals are in place for a successful 1997. While everyone in the industry can’t win the championship, most should have a winning season.