Lodging Industry

Lower RevPAR Forecast Reflects Impact of Recession - PKF Hospitality Research has announced that it has lowered its 2008 forecast for a key hotel industry metric, revenue per available room or RevPAR, from up 4.5 percent to up a below-average 3.0 percent. The new RevPAR forecast appears in the firm’s recently released first quarter 2008 Hotel HorizonsSM report. The change was based on revised projections by Moody’s Economy.com, PKF-HR’s primary economic forecasting agency, which now is calling for a U.S. recession this year due to deteriorating economic fundamentals.Declining economic fundamentals, fueled by the turmoil in the capital markets and the escalating price of oil, portend a much weaker domestic economy for the months ahead, according to Economy.com. Its 2008 estimate of Real Personal Income Growth, a key measure of lodging industry performance, now is only 1.6 percent, down from an estimate of 2.6 percent as recently as the fourth quarter of last year. While this is certainly not good news for lodging industry participants, PKF-HR still believes that the typical U.S. hotel will enjoy increases in both revenues and profits, but at a more modest pace.“Our econometric forecasting model focuses on Real Personal Income and Total Employment as the primary indicators for lodging demand,” said Mark Woodworth, president of PKF Hospitality Research. “These economic measures are forecast to exhibit minimal growth during the first part of 2008, but start to climb back to their equilibrium levels during the latter months of the year. Accordingly, we are forecasting the demand for lodging accommodations to inch up 0.9 percent in 2008. This pace of demand growth is approximately half of the long-term annual average, but still represents a net gain in accommodated room nights for the year. When looking at 2008, we believe that U.S. hotel owners and operators will struggle to grow their revenues and profits, but market conditions will not be as damaging as we saw back in 1991 or 2001.”Woodworth noted that the 2008 first quarter is expected to be moderately positive for hotels, but added that lodging performance will deteriorate as the year progresses. He suggested that the downswing should be relatively short-lived, however, with a turnaround expected in the 2009 first quarter.Supply and DemandUnfortunately for U.S. hotels, the forecast of sluggish demand growth occurs during a period of increases, albeit modest ones, in lodging supply. In 2008, PKF-HR estimates that a net count of 115,000 new hotel rooms will become available. With the demand for hotel rooms lagging the supply of new inventory, the U.S. national average occupancy rate is expected to decline a full point, from 63.2 percent in 2007 to 62.2 percent in 2008.“The pipeline for hotel development has swelled in recent years to extremely high levels, but the high cost of building materials and disciplined lending has limited the number of projects that actually made it to the construction stage. The increase in supply we are observing in 2008 and into 2009 is related to hotels begun prior to the onset of more restrictive lending practices,” Woodworth said.Further tightening within the lending community, combined with the continued strength in commodity prices, will once again be a formidable hurdle for developers in most markets in 2008 and 2009. Therefore, looking down the road, PKF-HR is projecting a lull in new supply openings from 2010 through 2012. “Forecasts of economic recovery, plus a slowdown in the pace of new supply, will lead to increasing occupancy levels beyond 2009,” Woodworth explained.InflationDespite the increased competition and declining occupancy levels in 2008, PKF-HR is forecasting average daily room rates to rise above the expected rate of inflation. “After analyzing historic periods of economic recession and rising inflation, PKF-HR found that hotel managers have been able to pass along inflationary increases to their guests,” Woodworth observed. “Accordingly, we are forecasting room rates to rise 4.7 percent in 2008. This exceeds both the 2.7 percent projected pace of inflation for 2008, and the 3.5 percent long-term annual average change in room rates