Hotel HorizonsSM is a quarterly series of reports containing five-year forecasts of performance for the U.S. lodging industry and 50 major markets across the country.  The lodging forecasts presented in the March 2009 edition of Hotel HorizonsSM are based on Smith Travel Research (STR) hotel performance data through December 2009 and Moody�s Economy.com�s February 2009 economic forecast for the nation.  The latter reflects the expected impact of the recently enacted federal legislation aimed at stimulating the economy.

�Our national forecast encompasses the aggregate performance of thousands of hotels located all across the country.  At that level, the outlook for the U.S. lodging industry is grim,� said R. Mark Woodworth, president of PKF Hospitality Research.  �However, when analyzing the data for each of the 50 individual markets that comprise our Hotel HorizonsSM universe, it is clear that lodging behavior can vary considerably from market to market.�

The Pain Is Now

The PKF-HR March 2009 national forecast calls for a 13.7 percent decline in RevPAR during the current year, representing a downward revision to the 9.8 percent decline anticipated earlier this year, a time when the economic outlook was not quite as severe.  The revised 2009 forecast is the result of a 7.8 percent fall off in occupancy and a 6.4 percent drop in Average Daily Rate (ADR) for the year.

�Of most concern are declining room rates,� Woodworth noted.  �The 6.4 percent decrease in ADR forecast for 2009 is the largest annual decline observed by PKF-HR since the firm began compiling data in 1932.  When revenue contraction is heavily influenced by declines in ADR, the downward impact on profit is amplified.�  PKF-HR is forecasting that the average U.S. hotel will experience a 30.1 percent decline in profits during 2009.  This, too, is a level of deterioration not seen since the 1930s.  Profits are defined as income before the deduction for capital reserves, rent, interest, income taxes, depreciation, and amortization.

Although double-digit declines in both revenues and profits appear certain, the new report indicates there is a small pinpoint of light at the end of the economic tunnel.  The most severe declines in performance for U.S. hotel owners and operators are forecast to occur in the current quarter, and should begin to subside by mid-2009.  �Fading revenues will persist throughout 2009 and 2010.  However, the magnitude of RevPAR declines will taper off to single digits beginning in the fourth quarter of 2009,� Woodworth said.  �Continuing declines will further erode profits, but the leaching will become less painful as we move through this deep and extended trough in the business cycle.�

Minn-ea and Mickey

Most everyone has conceded that 2009 is going to be a year of poor performance for U.S. hotels.  Therefore, the focus of industry participants has shifted to the recovery.  When will things start to improve?

�All 50 markets forecast by PKF-HR are projected to experience an annual decline in RevPAR in 2009,� Woodworth said.  �However, by the end of the year, two of the 50 markets are forecast to show year-over-year gains in their fourth quarter RevPAR, and will sustain this growth into 2010.�

PKF-HR�s Hotel HorizonsSM econometric model forecasts a fourth quarter 2009 RevPAR gain of 6.8 percent in Minneapolis over the fourth quarter of the prior year.  Much of this improvement can be explained by the extremely weak fourth quarter realized in Minneapolis in 2008.  Year-over-year increases in RevPAR are forecast to continue each and every quarter from the fourth quarter of 2009 through 2013. 

In California, Orange County hoteliers should also see some relief beginning in the last three months of 2009.  Hotels in and around Disneyland are forecast to enjoy a slight improvement in RevPAR of 1.7 percent in the fourth quarter of 2009, and another relatively big upward push of 7.7 percent in the first quarter of 2010.  Well below average increases in supply in Orange County should help to improve industry fundamentals.

While San Antonio and Baltimore are both forecast to suffer declines in occupancy during the current year, they are the only two markets in the country where an improving local economy will generate more lodging demand in 2009 than in 2008.  �Unfortunately, significant net increases in supply will far out-strip the gains in market area demand in these cities.  The room inventories in San Antonio and Baltimore are projected to grow 8.6 and 7.2 percent, respectively, in 2009,� Woodworth cautioned.

Some Will Enjoy 2010

�Economics can be a dismal and disappointing science.  In today�s environment, a slowdown in the pace of revenue declines may be hailed as an improvement,� says John B. (Jack) Corgel, the Robert C. Baker professor of real estate at the Cornell University School of Hotel Administration and senior advisor to PKF Hospitality Research.  �The darkest hour is always just before the dawn, and we expect to see that in mid-2009.  Subsequently, the rate of decline will begin to moderate, and national RevPAR is forecast to decline just 3.2 percent in 2010, the result a 0.9 percent drop in occupancy and a 2.3 percent decrease in ADR.�

In 2010, the vast majority of cities are still forecast to experience a decline in RevPAR for the year.  However, emerging signs of economic recovery are expected in many markets, and 14 cities across the U.S. will enjoy RevPAR increases over 2009.  Joining Anaheim and Minneapolis as the markets expected to lead the lodging industry recovery are the cities of Atlanta, Austin, Detroit, Oahu, Fort Worth, Raleigh, Chicago, Dallas, Nashville, Columbus, Albuquerque, and Houston.

�The upward trajectory of revenue projected for these markets in 2010 will draw some attention,� Woodworth observed.  �However, lenders, investors, and operators should continue to be cautious because all but the hotels in Houston are forecast to continue to report occupancy levels below their long-term average.�

By 2011, all 50 markets covered by PKF-HR Hotel HorizonsSM forecasts are projected to achieve gains in performance.  All three of the major top-line measures (occupancy, ADR, and RevPAR) are forecast to grow each and every year from 2011 through 2013.

Are There Any Winners?

�Knowing that local market conditions vary, we evaluated which cities will have suffered the most, and the least, by the time this protracted downturn has ended,� Woodworth said.  �Using 2008 and 2011 as the bookends of the current industry recession, we calculated the changes in supply, demand, and RevPAR for all 50 markets included in our Hotel HorizonsSM universe.  Some of the results are positive in nature; however, most are depressing.�

Compounding the negative impact of the economic recession, hotel managers in San Antonio will have to endure a 24.1 percent increase in competition from 2008 through 2011.  This is the greatest rate of increase in supply in the nation during this time period.  On the other end of the spectrum, operators on the island of Oahu are seeing a 6.1 percent decline in the number of hotel rooms they have to compete with.  Unfortunately, the demand for accommodations in Oahu is simultaneously falling at an annual rate of 1.2 percent.

Aided by a 2008 boost in oil prices, as well as the unfortunate displacement of residents due to Hurricane Ike, Texas hotel markets are enjoying the greatest increases in lodging demand.  From 2008 through 2011, the cities of Fort Worth, San Antonio, Houston, Dallas, and Austin are forecast to benefit from annual demand growth in excess of 2.0 percent.

In total, 25 lodging markets are forecast to accommodate fewer guests in 2011 that they did in 2008.  Leading the way in annual declines in demand are Oakland, Los Angeles, Detroit, and Tampa.  All four of these cities are forecast to suffer annual declines in demand greater than 2.0 percent.

�Using RevPAR as the measure of a market�s health, only six of the 50 cities analyzed will be able to match their 2008 RevPAR levels by 2011.  This just further illustrates how deep and long this industry recession is expected to be,� Woodworth noted.  The six markets able to post a positive RevPAR growth rate from 2008 to 2011 are Austin, Oahu, Minneapolis, San Francisco, Houston, and Chicago. 

Compound annual declines in RevPAR in excess of 6.0 percent from 2008 to 2011 are forecast for the cities of Charlotte, New York, Orlando, Fort Lauderdale, and Tucson.  �The reasons for the protracted poor performance in these markets vary.  In New York, it is a matter of supply growth outpacing gains in demand.  In the four other markets, we are projecting declines in demand, brought on by weaker economic conditions,� Woodworth observed.

Pay Attention

Research conducted by PKF Hospitality Research found that 70 percent to 80 percent of a hotel�s performance is systematically linked to the local economy.  Therefore, it is imperative for all lodging industry participants � lenders, investors, and managers alike � to gain a thorough understanding of the unique local factors that influence each individual asset in which they have a stake.

�Yes, the general direction of the lodging industry is downward.  However, as a national consulting firm with professionals that have on-the-ground experience throughout the country, we see significant differences in the major measures of each local lodging market,� Woodworth said.  �In some areas, increased competition is driving the poor performance.  In other markets, declining employment or income levels are suppressing demand.  In the face of poor market conditions, some hoteliers will retain pricing power, while others will not.  The differences are striking and require deep thought and analysis.�

To purchase Hotel HorizonsSM forecast reports for the United States, or one of 50 individual markets, please visit the firm�s online store at www.HotelHorizons.com, or call (866) 842-8754.

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, Miami, Indianapolis, Houston, Dallas, Bozeman, Sacramento, Seattle, Los Angeles, and San Francisco.
 

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