|by Patrick Quek, January 1999
Across the board, all lodging industry pundits (including PKF Consulting) are projecting a decline in occupancy during 1999. However, a survey of 411 hotel general managers conducted by our firm found these property-level operators to be much more optimistic. In fact, on average, they are projecting a 2.0 percentage point increase in occupancy for 1999. Why are they so upbeat? What do they see looking out their windows that the rest of us have missed searching our crystal balls?
Budgets Are Always Up
First, we must recognize that the source for the forecasted information was the 1999 budgets prepared by the hotel managers. And, as we all know, no one ever budgets to do worse than they did the prior year. Therefore, the forecast of the two point increase in occupancy may be the result of age-old habit of always projecting to do better than the prior year. Budgets showing growth usually gain approval from corporate officials much more quickly and easily than those anticipating a decline in performance.
While the actual numbers that management is forecasting to achieve in 1999 may or may not actually occur, the survey does shed light into managementís strategies for the relative movement of occupancy and ADR, as well as revenues and expenses.
No Where To Go But Up
While no single property type category or market position segment is projecting a decline in occupancy, some are more optimistic than others regarding their potential for growth in 1999.
The survey shows that managers of lower-priced properties and all-suite hotels are forecasting the greatest increases in occupancy. In recent years, the greatest increase in supply has occurred in the economy segment, while moderately priced extended-stay hotels have been the hottest product type. The net result of all the construction in these two segments has been a lowering of occupancy levels. Therefore, any increases foreseen for 1999 may simply be the result of recovery from a depressed level of performance or the ramp-up of occupancy as the new all-suite properties establish themselves in their respective market areas.
On the other hand, full-service hotel properties in either the mid-market or upper-end of the pricing scale have enjoyed relatively strong performance levels in recent years. While the economy and new all-suite properties may be climbing up from the bottom, and therefore have plenty of room for growth, most full-service and upper-end hotels are already achieving occupancies greater than their long-term average. Therefore, many of these properties have hit their realistic ceiling and just do not have as much room to grow.
Rate Outlook A Little Less Aggressive
While managers appear to be very aggressive in the assumptions regarding occupancy growth for 1999, they plan to raise their room rates by only a moderate 4.5 percent. This pattern is contrary to recent industry trends that have seen declining occupancies paired with strong growth in average daily rates.
With the advent of automated yield management systems and continued growth in demand, recent industry data has shown that hotels have sacrificed occupancy in an effort to continue to increase room rates two to four times the pace of inflation. With revenue growth driven mainly by increases in pricing, a greater percentage of the growing revenue has dropped to the bottom line, resulting in all-time record levels of profitability.
Projecting relatively moderate growth in room rates might signal a return to the pricing practices that, in the past, were merely routine. Prior to the 1990s, most hotel managers responded to declines in occupancy by cutting their rates. The accepted theory was to preserve your market share through discounting.
Given the strong correlation between growth in room rates and growth in profits, it remains to be seen if the recent record levels of profitability will be maintained if the industry resorts to discounting.
The Discerning Detail
When analyzing the forecasts by type of property, the numbers begin to tell a story that is pretty consistent with the market conditions observed by PKF Consulting.
The majority of 411 properties in the survey were full-service (62.1%) hotels, followed by limited-service (22.6%), all-suite (10.9%), and resorts (4.4%). Approximately 70 percent of the hotels are affiliated with a national chain. Slightly more than half the properties (51.3%) identified themselves as residing in the middle of their respective markets, while 7.6 percent of the respondents were upscale properties and 41.1 percent considered themselves to be in the economy segment.
For a full summary of the results of the survey, please contact Mr. Sean Showers in the Research Department of PKF Consulting at (404) 842-1150.
Patrick Quek is president and CEO of PKF Consulting, an international hospitality consulting firm headquartered in San Francisco.