Hotel Demand Continues to Outpace Room Rates
PKF Hospitality: Lodging Profitability Hindered By Flat Growth In Room Income
By Randyl Drummer
July 13, 2011
Average daily room rates (ADR), an important metric for lodging company profitability, continue to lag even as the hotel sector recovers and occupancies rise amid little new supply, according to PKF Hospitality Research (PKF-HR).
PKF-HR forecasts that the demand for U.S. hotel rooms will increase a solid 4.9% in 2011, while average rates paid by guests will rise a more modest 2.4%.
The ability to raise room prices directly benefits a hotel operator’s earnings. However, improved occupancy, rather than increasing room pricing, has driven the rise in hotel revenues since the lodging recovery began in first-quarter 2010.
“Given the headwinds created by stagnant employment and continued weakness in the housing sector of the economy, it is somewhat surprising that hotel demand continues to bounce back as quickly as it has,” said R. Mark Woodworth, president of PKF-HR. “Offsetting the surge in demand, however, has been relatively sluggish increases in room rates. And as hotel owners and operators know, it is ADR growth that powers profits.”
Robust increases in demand and limited new development suggest that hoteliers should be able to aggressively start raising rates, Woodworth noted. However, competition is intense for the dollars of a rising number of business and vacation travelers, and with a few exceptions, consumers have found an ample supply of available hotel rooms this summer.
“ADR, much like lease rates for commercial properties, are far harder to increase than occupancy rates,” said Chris Macke, senior real estate strategist for CoStar Group, Inc. “While constrained supply has provided the floor for hotel performance, only increased demand will raise the current ceiling on ADR.”
Demand hasn’t yet risen enough to push strong rent growth. PKF is forecasting that only 12 of the 50 largest U.S. lodging markets will achieve occupancies in 2011 greater than their long-term averages. Not until 2013 will the majority of those 50 markets exceed their broader occupancy average.
However, at worst, the projections amount to a slight slowdown or lengthening of the U.S. lodging recovery. Analysts expect stronger room rate growth in the second half, and PKF-HR forecasts that ADR will accelerate to 5.5% next year and 5.8% in 2013.
Prompted by a souring outlook for the broader U.S. economy this year by Moody’s, PKF-HR last month revised its March forecast for 2011 revenue per available room (RevPAR) growth downward slightly from 7.1% to 6.9%, and from 8.9% to 8.7% for 2012.
“Our June [revised] forecasts show that the length of the recovery for the U.S. lodging industry has been extended a bit, but we are definitely on an upward trajectory,” said Dr. Jack Corgel, professor of real estate at the Cornell University School of Hotel Administration and senior advisor to PKF-HR. “Travelers are returning to the road despite the slowing economy, new supply is not an obstacle and hotel managers are effectively controlling their costs.”
Recent weekly numbers from Smith Travel Research (STR) showed year-over-year increases in all three key performance indicators. Occupancy rose 5.8% to 67.1%, ADR rose 3.9% to $100.77 and RevPAR finished the week of July 2 up 9.9% to $67.66. For the July 4 weekend, revenue growth rose by double digits, underscoring the increase in leisure travel over 2009 and 2010.
Hotel companies heartened by rising occupancy may have pushed room rates too hard earlier in the year, hurting overall RevPAR growth, said Joshua Attie, lodging REIT analyst for Citi in a note to investors. But a combination of better yield management and strengthening business travel now positions the hospitality industry for improved pricing and margins in second-half 2011 and through 2012, Attie said.
All indications show that the recovery, which began with per-room revenue increases in upper-tier properties in 2010, is spreading across the rest of the lodging spectrum this year. Luxury properties will continue to enjoy the strongest RevPAR gains in 2011 at 10%, followed closely by properties in the upscale segment at 9.4%.
RevPAR for upper mid-scale, mid-scale and economy hotel chain categories will grow more slowly, ranging from 4.3% to 5.7% this year, as developers ramp up the supply of select-service, boutique, and extended-stay hotels popular among travelers, Woodworth said.
In 2012, PKF-HR forecasts per-unit revenue growth will exceed 10% in luxury, upper-upscale and upscale properties. The upper-midscale will increase by 8.7% next year, while midscale and economy properties should both see a 6.6% RevPAR boost.
Despite the smaller-than-expected room rent gains, PKF-HR projects that hotel unit-level net operating income (NOI) will rise 11.7% this year. in 2011. As room rates begin to drive RevPAR, the consulting firm estimates profit growth will jump to nearly 18% in 2012.
