US Hotel Market Set To Prosper Through 2016: PKF

　　Looking forward, the U.S. lodging industry will see perpetual gains in demand, occupancy, ADR and RevPAR through 2016, according to a new study from PKF Hospitality Research.

　　RevPAR for U.S. hotels is projected to grow at a compound annual average rate of 7.2% for the next four years. This is more than double the historical long-run average.

　　However, the U.S. federal government’s ongoing “fiscal cliff” budget standoff is clouding what would otherwise be a sunny outlook for 2013.

　　“Despite all these positives, there is a pall on lodging industry participants induced by the federal budget negotiations,” said R. Mark Woodworth, president of PKF-HR. “Hoteliers are eager to begin enjoying what appears to be a four year period of sustained high levels of prosperity. Unfortunately, there is so much uncertainty surrounding 2013 that almost no one overtly is showing the optimism that should exist. Without falling off the fiscal cliff, we believe RevPAR in 2013 will increase by 6.0%. However, if budget negotiations fail, it can be assumed that RevPAR growth will be well below that. The good news is that under most every economic scenario, 2014 is shaping up to be a year of strong gains in both occupancy and ADR. Beyond 2014, without any meaningful new supply additions in sight, we should see record profitability.”

　　By year-end 2013, PKF-HR is forecasting the national occupancy rate to be 62.1%. While this is below the pre-recession peak of 63.1%, it does surpass the long-run average occupancy level of 61.9% per STR. “From previous research, we know that once occupancy reaches this important milestone, hotel managers gain the leverage they need to be more aggressive with pricing. Over the next four years, we are forecasting ADR growth of 5.4% on a compound annual basis,” Woodworth said.

　　Much of the gains in ADR will be experienced by properties in the luxury, upper-upscale, and upscale chain segments. Occupancy levels for these properties are projected to remain above 70% through 2016.

　　Properties in the upper-tier chain scales have led the recovery, but going forward PKF-HR is projecting the demand for more moderate-priced hotels to pick up. “This is consistent with the changes we have observed in the economic factors that have the greatest impact on lodging performance,” said John Corgel, professor of real estate at the Cornell University School of Hotel Administration and senior advisor to PKF-HR. “The initial stages of the recovery were influenced by growth in personal income, which favors the generation of demand for higher-priced hotels. Now we are starting to see slight improvements in employment, the economic variable that stimulates greater levels of demand for lower-priced accommodations.”

　　With roughly 85% of future RevPAR growth driven by increases in ADR, PKF-HR is forecasting unit-level net operating income to grow at a compound annual rate of 10.0% through 2016. “We are in the middle of five consecutive years of double-digit gains in hotel profits, a streak not seen since the high inflation days of the 1970s,” Woodworth said.

　　PKF-HR is forecasting ADR gains throughout the 50 U.S. markets it examined. Conversely, for 20 of these markets, the annual occupancy rate is expected to decline. In seven of the 20 markets, the decline in occupancy can be attributed to a forecast drop in the number of rooms occupied. “On the surface, it is concerning that we are observing declines in demand. However, for cities like Oakland, Oahu, San Francisco, and Los Angeles, occupancy levels will surpass 70%. These cities are at a point in their respective business cycles where price hikes will deter demand. But that is OK, and potentially more profitable for most hotels,” Woodworth said.

　　As with its ADR predictions, PKF-HR is forecasting a 2013 RevPAR increase in all 50 markets. Among the 10 markets forecast to enjoy the greatest gains in RevPAR, five are located in Texas. On the other end of the spectrum, five of the 10 markets projected to achieve the least growth in RevPAR are cities experiencing relatively strong levels of levels in supply growth. On average, the room inventory in these ten cities will rise by 1.7% in 2013.