Hotel Online  Special Report


Quantifying Hotel Demand
Growth Projections
By Jeffrey H. Walker, MAI, CHME, April 2004

Within the hotel community, there is finally a sense that demand may be turning the corner. But the optimism is still somewhat cautious, as several previous predictions of increasing demand since 9/11 have failed to fully materialize. 

To get a clearer picture of future trends, USRC has analyzed historical hotel demand increases in relation to historical levels of business fixed asset investment, as tracked by the U.S. Bureau of Economic Analysis. In general, during periods of economic recession, corporations cut costs in order to protect bottom-line profits in a weakening sales environment. Historically, corporate travel, including travel to conventions and corporate meetings, is one of the first expenses cut in a slowing economy. During an expanding economy, corporations invest in future profits by increasing sales, marketing, and training, which includes increased business travel. Similarly, corporations have similar spending habits on long-term fixed investments in such items as computers, software, infrastructure, and buildings. Thus, the demand for corporate travel, as well as group and convention demand for hotels often mirrors the statistical data on corporate fixed investment.

The following chart presents the historical change in business fixed investment. As presented, during a period of rapid increases in full-service hotel demand (the late 1990’s) corporate fixed investment saw very strong growth. Similarly, during one of the worst downturns in the hotel industry for groups and conventions, corporate investment shrunk. 

Business Fixed Asset Investment Change
Percent Change from Previous Period
10.5% 9.3% 12.1% 11.1% 9.2% 8.7% -4.5% -7.2% 4.4%
Source: U.S. Bureau of Economic Analysis

The following chart graphically demonstrates the relationship between historical demand changes, according to Smith Travel Research, and the above business fixed asset investment changes.

In general, hotel demand has closely tracked trends in business fixed asset investment, with hotel demand experiencing more moderate fluctuations. In 2002, hotel demand recovered somewhat quicker than fixed asset investment, but the trend returned to normal in 2003.

The historical business investment picture becomes clearer when looking at the historical data on a quarterly basis. As demonstrated in the chart below, despite only modest growth in 2003 on a calendar year basis, business investment dramatically increased throughout 2003, after negative trends in 2002.

Business Fixed Investment Change
Percent Change from Previous Quarter
2002 Q1
2002 Q2
2002 Q3
2002 Q4
2003 Q1
2003 Q2
2003 Q3
-7.0% -3.0% -1.1% -0.1% -0.6% 7.0% 12.8% 10.9%
Source: U.S. Bureau of Economic Analysis

The advantage of establishing this relationship is the availability of projections for changes in business fixed asset investment. The following table presents projected changes to business asset spending for the next two years by quarter, according to the Mortgage Bankers Association.

Business Fixed Investment Change
Projected Change
2004 Q1
2004 Q2
2004 Q3
2004 Q4
2005 Q1
2005 Q2
2005 Q3
14.6% 12.6% 12.8% 12.4% 10.3% 8.3% 6.7% 6.4%
Source: U.S. Bureau of Economic Analysis

As indicated, the association projects double-digit growth in business fixed asset investment for the next five quarters, rivaling or exceeding the growth experienced during the hotel expansion years of 1995-1998. If the relationship holds true, hotel demand should be "pulled up" by the dramatic rise in business investment, and hotel demand increases in the late 1990’s range of 3.0 – 5.0% should be achievable for the next 12 – 18 months. Coupled with the projected slower increase in supply, these demand increases provide a strong indicator of an environment of increased occupancy and, with increased compression in many markets, increasing ADR. As hotels continue to focus on expense control, this improving top-line environment should lead to strong flow-through to the bottom line, with a result of healthy improvement in hotel profitability. 

Jeffrey H. Walker, MAI, CHME, is Director of Hospitality Services for US Realty Consultants’ corporate office in Columbus, Ohio. The company has offices in Chicago, Atlanta, and Cleveland, and will soon be expanding to West Palm Beach. He can be reached at 614-221-9494 (ext. 127), or at


Jeffrey H. Walker, MAI, CHME
Director of Hospitality/Appraisal Services
US Realty Consultants, Inc.
Corporate Headquarters
492 South High Street, Suite 200
Columbus, Ohio 43215
614-221-9494 ext. 127 (phone)
614-221-9941 (fax)

Also See Hotel Capitalization Rates Drop Again / David J. Sangree, MAI, CPA, ISHC / April 2004
Hotel Capitalization Rates Drop / David J. Sangree, MAI, CPA, ISHC / February 2003
Appraisal and Financing of Indoor Waterpark Resorts / David J. Sangree / October 2003
The Effect on Capitalization Rates and Discount Factors After September 11 / Canadian Lodging Outlook / Dec 2001
Will Hotel NOIs and Property Prices Follow Revenues in Their Downward Spiral? / John (Jack) B. Corgel, Ph.D / Hospitality Research Group of PKF Consulting / June 2002

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