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PKF Revises Forecast to Reflect Acceleration
of Economic Downturn


ATLANTA, Ga., October 28, 2008 – The downward gravitational pull on the national economy resulting from extraordinary financial events currently playing out on Wall Street and in Washington has prompted PKF Hospitality Research (PKF-HR) to revise downward its hotel industry forecast for 2009 issued September 2008.  The company is now expecting RevPAR and profit declines of 4.3 percent and 7.9 percent, respectively, for U.S. hoteliers in 2009, according to its updated forecast.
The new forecast reflects research reported by Smith Travel Research (STR) in September that projects a 5.9 percent drop in occupancy and weak average daily rate growth, which PKF believes is just the beginning of an even greater protracted decline expected for the industry.  Mark Woodworth, president of PKF-HR, in a special update released today, noted that “the speed and severity of the downturn in the national economy, both that which has already occurred, and that which is anticipated for the year ahead, has vastly exceeded our previous expectations.  Thus, for only the second time since the events of 9/11, we feel that a mid-term update is warranted.”
The projected deterioration in industry performance will be driven primarily by a 1.5 percent decline in 2009 lodging demand, aggravated by a 3.0 percent rise in supply.  Given the increased competitive market conditions, U.S. hoteliers will only be able to raise their room rates by a mere 0.1 percent next year.  The net result will be a 4.3 percent drop in RevPAR.  PKF-HR now forecasts that the average U.S. hotel will suffer a 7.9 percent decline in profits in 2009.
These findings are included in a special update of the third quarter 2008 edition of Hotel HorizonsSM released in September 2008, and were driven by the recent downgrade from Moody’s (Moody’s).  Hotel HorizonsSM is PKF-HR’s quarterly forecast report for the U.S. lodging industry.  The updated forecast was prepared by PKF-HR in response to recent unprecedented economic news and events.
The magnitude of the decline in hotel profits forecast by PKF-HR as recently as September has more than doubled since then.  “Our outlook for the U.S. lodging industry has deteriorated dramatically in a fairly short period of time,” Woodworth said.  “We were pessimistic this past summer when we forecast a 3.0 percent decline in profits.  Our view now appears optimistic as we consider the revised economic environment being painted for the remainder of 2008 and into 2009.  It’s not the depth of the upcoming lodging industry recession that concerns us.  It is how fast market conditions have weakened, and the rapidly changing outlook for the nation’s economy.  Uncertainty is the greatest bugaboo.  One need look no further than the recent performance of the stock market to realize the level of uncertainty, and resulting volatility, that exists today.”
PKF-HR’s Hotel HorizonsSM forecasting model is driven by historical hotel performance data provided by STR and economic forecasts produced by Moody’s.  During the month of October, Moody’s adjusted their economic forecasts for 2009.  The revisions encompass a 0.9 percent downward adjustment in total personal income, along with a 1.2 percent downward adjustment to employment.  The Hotel HorizonsSM model relies on employment and income as the two primary drivers of lodging demand.
Mark Zandi, chief economist and co-founder of Moody's, was recently reported as saying, “The job market has eroded measurably, and industrial production has weakened sharply in the last couple of months.  Those are the two key things.  Retail sales have also sharply weakened.”
Jack Corgel, the Robert C. Baker Professor of Real Estate at the School of Hotel Administration at Cornell University and senior advisor to PKF-HR, commented on the current industry outlook.  “In the current environment, all prices are falling: room rates, other revenues, profits and, ultimately, values” Corgel noted.  “The decline in profits, combined with the scarcity of debt and overall level of market volatility, has clearly created downward pressure on asset values.  These are conditions that will likely persist well into 2010.  That being said, savvy investors and opportunistic lending sources will emerge in the near term, and money will be made.”

Losing Leverage
PKF-HR is forecasting that U.S. hotels will average a 58.3 percent occupancy level in 2009, or 4.4 percent less than the 61.0 percent mark projected for year-end 2008.
“The 58.3 percent occupancy rate we are forecasting for 2009 will be the lowest level of occupancy posted in the past 20 years,” Woodworth said.  “At that level, hotels face many problems.  First, they lose their leverage to negotiate price increases.  Second, the benefits of operating leverage diminish dramatically as occupancy erodes.  There are certain fixed costs of operation that owners have to pay regardless of the decline in number of guests.  This is why profit margins will drop a full point from 29.6 percent in 2008 to 28.5 percent in 2009.  Hotels running at higher performance levels entering the downturn are better positioned to endure the weak periods ahead, but even the most talented of managers will be tested.”
While the poor economic conditions present daunting challenges, they also create some beneficial side effects.  “The lack of financing has all but stopped the start of construction for new hotels for this year and next.  Therefore, we will see fewer rooms open up in the later part of 2009 and into 2010,” Woodworth said.  “In addition, it should be noted that the vast majority of hotel owners are not overleveraged, and debt coverage ratios were high entering this industry recession.  Foreclosures and bankruptcies will escalate, but we will not see an epidemic.”

New York Down, But Not Out; All Markets to Lose RevPAR
Hotel performance is heavily influenced by local economic conditions.  Therefore, it is important for hotel owners and operators to understand what is happening in their own backyards.
“New York has been the center of attention for all the poor economic news during the past two months.  Therefore, it is not surprising that hotels throughout the metro New York area will suffer one of the strongest declines in occupancy,” Woodworth said.  “Despite the expected 6.9 percent fall in demand, New York hotels are still forecast to achieve a very high occupancy rate of 77.3 percent in 2009.”
For comparison purposes, other major cities along the East Coast and in the Midwest are forecast to achieve significant declines in occupancy.  For example, Atlanta (-3.6 percent), Chicago (-6.8 percent), Dallas (-5.5 percent), Orlando (-3.0 percent), and Washington, DC (-4.2 percent) will all see their occupancy levels plummet in 2009.  Still declining, but showing some resiliency in occupancy, are hotels in the West Coast cities of Seattle (-2.7 percent) and San Francisco (-3.2 percent).  Like New York, San Francisco is forecast to achieve an occupancy rate in excess of 70 percent (74.1 percent) in 2009.
“In September, we anticipated that only a handful of the 50 largest U.S. lodging markets across the country that we track would realize an increase in Revenue per Available Room (RevPAR) next year,” Woodworth said.  “To varying degrees, all will realize a decline in RevPAR in 2009.  That compares to only 18 markets this year.”

Beyond 2009
Come 2010, the relevant economic indicators are forecast to begin to drive lodging demand upward.  This will happen simultaneously with diminished levels of new supply, thus resulting in gains in occupancy and, eventually, pricing power.  “Given all the lodging industry will have to deal with in 2009, it is hard to look beyond a 12-month window.  However, a glance at 2010 does reveal the beginning of an upward trend,” Woodworth concluded.
To purchase Hotel HorizonsSM reports for the United States, or one of 50 individual markets, please visit the firm’s online store at, or call (866) 842-8754.  Please note the updated national forecast was provided solely as guidance for subscribers of Hotel HorizonsSM subscribers.  No updated reports have been published for the nation, or any individual cities.
PKF Hospitality Research (PKF-HR), headquartered in Atlanta, is the research affiliate of PKF Consulting, a consulting and real estate firm specializing in the hospitality industry.  PKF Consulting has offices in Boston, New York, Philadelphia, Washington DC, Atlanta, Indianapolis, Houston, Dallas, Bozeman, Sacramento, Seattle, Los Angeles, and San Francisco.


Mark Woodworth
PKF Hospitality Research
3475 Lenox Road, Suite 720
Atlanta, GA  30326
(404) 842-1150, ext 222


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