Recovery Outpaces Expectations

In a letter to subscribers of our Hotel Horizons forecast reports, Mark Woodworth, president of Colliers PKF Hospitality Research, summarized the performance of the U.S. lodging industry during the third quarter of 2010.

The contents of that letter are published below.

After reviewing the 2010 third quarter performance data for the U.S. lodging, it is apparent that we are solidly into the recovery phase of the business cycle.  According to data from Smith Travel Research (STR), U.S. hotels enjoyed an 8.4 percent increase in RevPAR during 3Q10 compared to 3Q09.  This was slightly better than the 7.6 percent RevPAR growth rate forecast by Colliers PKF Hospitality Research (PKF-HR).

Of greater significance to hoteliers is the 1.6 increase in average daily room rates (ADR) during the same period.  This is the first year-over-year quarterly increase in ADR for U.S. hotels since 3Q08.  And, as hotel owners and operators know, ADR growth is the key to gains in profitability.

For most lodging markets, the third quarter represents the peak period of the year.  Leisure travelers hit the road in July and August, while the convention season begins in September.  Therefore, with occupancy and ADRs at their highest levels, the improvement in growth rates is particularly encouraging.

Major Markets

The overall recovery is confirmed when analyzing individual market performance, but some subtle differences in the pace of recovery do surface.  During the third quarter of 2010, all 50 major U.S cities covered in our Hotel Horizons universe achieved growth in both demand and occupancy.  In fact, 21 of the 50 markets have enjoyed an increase in occupied rooms greater than 10 percent for two consecutive quarters.  An increase of this magnitude and breadth has never occurred since STR began collecting data in the 1980’s.

Despite the return of travelers to the road, discounting continues to linger.  In 22 of the 50 Hotel Horizons markets, average daily room rates suffered a decline from the same period in 2009.  In general, the areas that experienced a decline in ADR are smaller markets located in the midsection of the nation.  Conversely, several of the major coastal gateway markets saw their average room rates rise in excess of 4.0 percent.

Expectations

As previously mentioned, in the September 2010 edition of Hotel Horizons® PKF-HR forecast a 7.6 percent growth in RevPAR for all U.S. hotels during the third quarter of 2010, 0.8 percentage points less than the increase that was actually achieved.  While the PKF-HR forecast of a 6.7 percent increase in occupancy was spot on, it was the ADR growth rate that exceeded expectations – another good sign.  PKF-HR’s projection of a 0.9 percent gain in ADR was surpassed by an actual increase of 1.6 percent.

During the first two quarters of 2010, it was the strong growth in lodging demand, and therefore occupancy gains, which drove the RevPAR lifts that surpassed PKF-HR’s projections.  Now, as ADR begins to take over as the primary driver of increased revenues, we expect significant growth on the bottom-line.  The lingering question, however, is the extent to which operating costs will be contained.  Historically, during the recovery phase of the lodging cycle we have seen relatively strong increase in operating expenses as business volume rises and the payroll, amenities, and services that were cut during the recession are reinstated.

Clear Recovery

The U.S. lodging industry has clearly passed through the trough of the lodging cycle and begun its assent up the recovery curve.  So far the pace of the improved performance has surpassed expectations.  Based on PKF-HR’s preliminary analysis of the latest economic forecasts from Moody’s Analytics, it is likely that the next scheduled updates of our Hotel Horizons® forecasts for the U.S. lodging industry will reflect a continuation of the optimism that has taken hold during the first three quarters of 2010.

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Colliers PKF Consulting USA offers hotel appraisaland hotel valuation services, hotel market studies, hospitality litigation support, and hotel consulting services. Colliers International Hotelsoffers hotel brokerageand hotel transaction services. Colliers PKF Hospitality Research produces Hotel Horizons®, an econometrically based hotel forecast, Benchmarker^SM, a customized comparative hotel benchmarkreport, and Trends®in the Hotel Industry, a historical hotel financialpublication, as well as hotel researchand hotel analysisservices utilizing their hotel statisticsand hotel datawhich date back to 1936.