2012 Hotel Forecast: Recovery Better For Some, Not All
PKF-HR forecasts that rooms revenue (RevPAR) for U.S. hotels will rise 8.1 percent in 2011, and increase another 6.1 percent in 2012. Analyzing the performance of U.S. hotels in 2010 and 2011, we have seen the progression of indicators that one would expect during an industry recovery.
Occupancy levels increased in 2010, followed by real average daily rate (ADR) growth in 2011. The only surprise has been the pace and magnitude of the surge in hotel demand.
Of greater importance is the future direction of lodging industry performance. Looking forward, PKF-HR is seeing familiar signs along the road to recovery. Owners and operators are now focused on more aggressive pricing policies, which in turn will translate into strong growth in hotel profits. We believe market conditions during the next few years will allow them to achieve these goals.
PKF-HR always cautions its clients that the national statistics may, or may not, apply to the type and location of hotels they own or operate. Looking deeper into the data, PKF-HR finds a continued bias favoring the future performance of hotels in the upper-tier segments of the industry.
The imbalance of lodging performance is extremely evident when observing the forecast occupancy levels by chain-scale. Hotels operating in the upper-tier (luxury, upper-upscale, upscale) segments are all forecast to achieve occupancies above 70 percent in both 2012 and 2013, which will exceed their long-term average occupancy levels. Conversely, hotels in the lower-priced chain-scales will continue to achieve occupancy levels below their long-term average through 2013.
The unevenness of the recovery is also apparent when analyzing the performance of the 50 markets for which PKF-HR prepares Hotel Horizons forecast reports. In 41 of the 50 markets, hotels are renting more guest rooms today than they ever have in their history. However, the distribution of demand recovery varies by segment. In 49 of the 50 markets, upper-tier hotels have passed their previous peak levels of accommodated demand, but lower-tier hotels have reached the same milestone in only 16 cities.
The Pricing Challenge
With national occupancy levels approaching their long-term average, and no meaningful new hotel supply additions in the foreseeable future, it is not a surprise that the pace of ADR growth is forecast to accelerate. PKF-HR is projecting the ADR for all U.S. hotels to increase 4.7 percent in 2012 and another 5.3 percent in 2013. The long-term annual average for ADR growth is 2.8 percent.
With occupancy levels for upper-tier hotels forecast to exceed the 70 percent level, ADR growth for these properties will exceed the ADR increases projected for lower-tier hotels. However, all chain-scale segments are forecast to surpass their long-term average annual ADR growth rates in both 2012 and 2013.
Hotel managers are eager to push room rates, but growth in ADR can have both positive and some offsetting consequences later. We know that RevPAR driven by ADR is more profitable for hotels. However, Economics 101 says that price increases ultimately reduce the demand for a product or service.
PKF-HR is forecasting U.S. lodging demand to grow 2.0 percent in 2012. This is less than the annual growth rates observed in 2010 (+7.4 percent as reported by Smith Travel Research) and projected for 2011 (+4.8 percent). Industry participants should not be alarmed. The pace of growth for indicators such as demand, occupancy, RevPAR, and net operating income will be slightly less in 2012 than they were in 2011. This does not mean the industry is slipping back into a recession. A deceleration in growth is to be expected at times during a recovery. The trajectory of performance is still on the rise, just not as steep.
Overall Optimism For 2012
Many of PKF-HR’s clients have been scared by the news of gridlock in Washington and the negative economic climate in Europe. They are not pessimistic. They are just cautious in setting their expectations for 2012.
When we look at industry fundamentals, as well as the national economic forecasts of Moody’s Analytics, we remain quite confident that 2012 will be another favorable year of growth for U.S. hotels. However, each owner and operator needs to make sure they have a thorough understanding of the local market factors and economics that will impact their hotel. Hotel performance will be great for some in 2012, but others will continue to struggle.
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To purchase a December 2011 Hotel Horizon® report, please visit www.hotelhorizons.com. Reports are available for each of 50 major metropolitan areas in the U.S., and contain five year projections of supply, demand, occupancy, ADR, and RevPAR