Atlanta.  December 17, 2003.  In a national teleconference for Hotel Outlook clients and industry leaders last week, PKF Consulting�s Hospitality Research Group (HRG) and Boston-based Torto Wheaton Research (TWR) addressed the latest issues in what the two firms see as a recovery for the long-beleagured U.S. hotel industry.

Leading the teleconference were Mark Woodworth, Executive Managing Director of HRG; Dr. John B. (Jack) Corgel, of HRG and a Cornell University professor; Dr. Raymond G. Torto, Managing Director of TWR, and Dr. Petros Sivitanides, Vice President and Senior Economist at TWR.

According to Mark Woodworth, the U.S. hotel industry is in the early stages of an upswing, following the long-endured bottoming out that began in mid-2001 and was exacerbated by the events of September 11 of that year.

Turnaround began in Third Quarter of 2003, Will Continue Through 2005

�The third quarter of 2003 marks a turning point in the recovery of U.S. hotel markets.  Financial performance of hotels during the recently completed quarter was governed more by the expanding economy than fear of war and other event risks,� Woodworth said. 

HRG and TWR are predicting growth in both RevPAR and NOI, starting now and continuing through 2005 and beyond.  A lot of this positive view is based on what they term the �bounceback� phenomenon.

The firms measured the �bounceback� effect after recent major international events to show the resiliency of the industry even in the worst of times.  After 9-11, occupancies, room rates, and with them RevPAR, all dropped dramatically.  RevPARs stayed low until the Fourth Quarter of 2002 when subsiding travel fears drove increases in occupancy and a temporary �bounceback,� according to Dr. Raymond G. Torto of TWR.  Unfortunately, this improved performance was thwarted by the start of the Iraq War in the spring of 2003.

A similar �bounceback� was evident in the Third Quarter of 2003. Once the shock of the Iraq invasion passed, travel again increased and occupancies rose once more.  The upswing is expected to continue throughout 2004, driven by a strengthening U. S. economy and the continued lessening of the fear of potential hotel-users to travel.

Ironically, perhaps, the continued diminution of travel fear is thought to be even more important than an improved economy in helping boost the hotel industry in 2004 and beyond.  Demand in the full-service hotel sector is expected to increase by 6.3 percent in 2004, said Dr. Jack Corgel.  However, he said, 4 percent of this gain will come from the reduction in travel concerns, while only 2.3 percent will be due to the improved economy.

Corgel warns, however, that the future demand growth rates will not be achieved if the diminution of travel concerns does not occur, or worse, increases.

Tweaking �Conventional Wisdom�

The HRG-TWR presentation addressed several issues associated with hotel market recovery, enumerating where experts may agree and disagree.

Points of agreement are:

• A general economic recovery is underway.
• Hotel RevPARs bottomed out in 2002, and recovery has now begun.
• Markets remain sensitive to �event risk.�  That is, sensitive to actions which create fear and uncertainty, such as the invasion of Iraq.

• Hotel markets are not totally reconnected with the economy! � On the contrary, HRG and TWR estimates indicate that the reconnection is nearly complete.
• Hotel demand has been permanently disabled by up to 20%! � HRG and TWR forecasts do not show any permanent demand loss.
• Expenses can be held down during recovery! � A recent HRG study finds that, as the economy turns around and hotels experience increasing occupancy, management must spend more on labor and amenities to provide service levels that these now more optimistic travelers are thought � probably rightly so � to expect.

According to HRG and TWR, room rates will begin to show increases in major markets beginning in 2004.   Over the next eight quarters, the top ten markets for full-service hotels, in terms of RevPAR growth, are expected to be the following:

• Raleigh, NC, 
• Boston, MA, 
• San Francisco, CA, 
• Los Angeles, CA, 
• Miami, FL, 
• Denver, CO, 
• Northern New Jersey, 
• Dallas, TX, 
• Nashville, TN, and 
• Washington, DC.

• Indianapolis, IN, 
• Portland, OR, 
• Richmond, VA, 
• Charlotte, NC, 
• Dayton, OH, 
• Orange County, CA, 
• Columbus, OH, 
• Pittsburgh, PA, 
• Cleveland, OH, and 
• Omaha, NE.

After three years of declining RevPAR (the longest period of sustained declines in the past 70 years) hoteliers are waiting to see RevPAR improvement translate into growth in profits.  With RevPARs forecasted to improve 7.7 percent on average in 2004, HRG is projecting unit level profits to grow 13.4 percent.  �While a 13.4 percent increase is certainly strong, the potential exists for even greater profit growth in the future as RevPAR increases become driven more by ADR improvement than occupancy gains,� says Woodworth.

�From the investor�s side,� Dr. Torto commented, �this is the best time to buy into the business, even though from the operator�s point of view, business may look weaker than desired.� 

Turnaround in Investment Climate

Dr. Corgel said that, from the investment side, the quality of transactions seems to be improving.

�During 2002, many transactions involved non-branded or older properties,� said Corgel.  �However, in the last few months, we�ve seen an increase in high-profile transactions as we seem to be returning to a better trading environment.�

According to Corgel, hotel cap rates peaked in 2002 and have declined during the past year.

Another indicator of an industry beginning to turn around is that the number of hotels unable to cover debt service seems to have peaked, as well, said Corgel.  �That peak was reached this year, at 16 to17 percent, which, even at that, was not nearly as bad as what the industry experienced in the early 90s,� he said.

At the close of the presentation, HRG and TRW explained that their findings are part of an ongoing study.  The research firms will provide updated information at the A.L.I.S. Conference in Los Angeles at the end of January.  A more complete picture will be available at the next HRG-TRW quarterly telephone conference scheduled for sometime near the end of March, 2004.

The Hospitality Research Group (HRG), headquartered in Atlanta, is the research affiliate of PKF Consulting, the international consulting and real estate firm specializing in the hospitality industry.  PKF Consulting has offices in New York, Boston, Philadelphia, Washington DC, Atlanta, Houston, Dallas, Los Angeles, and  San Francisco.

Boston-based Torto Wheaton Research, is the premier provider of commercial real estate data, analysis, and consulting in the U.S.  An independent business unit of CB Richard Ellis, TWR tracks and forecasts commercial real estate supply and demand indicators and updates them quarterly.

Raymond G. Torto, Ph.D., CRE 
Managing Director
Torto Wheaton Research
200 High Street � Third Floor
Boston, MA 02110
(617) 912-5200