PKF-HR Forecasts Strong Hotel RevPAR Growth Despite Uncertainty
By James Shillinglaw
June 21, 2012 9:45 PM
PKF Hospitality Research, in a new survey, found that despite news that will likely influence the short-term economic performance of the U.S. economy, there will be strong revenue per available room (revPAR) growth for the nation’s lodging industry. According to the recently released June 2012 edition of Hotel Horizons, PKF-HR is projecting revPAR for U.S. hotels will increase by 5.8 percent in 2012, and another 6.6 percent in 2013. These forecasts are identical to the revPAR forecasts presented in the March 2012 edition of Hotel Horizons.
“Given the headlines of late, I understand why our clients are concerned about the future health of the economy and the U.S. lodging industry,” said R. Mark Woodworth, president of PKF-HR. “However, the fundamental questions should focus on how many of these headlines were a surprise. Sluggish job growth and economic chaos in Europe have been in the news for a while, and despite these conditions, the performance of the U.S. lodging market during the first quarter of 2012 was just as strong as we had forecast. Therefore, we see no reason to change our opinion regarding the remainder of the year.”
The 2012 annual revPAR growth forecast of 5.8 percent is the result of a projected 1.6 percent increase in occupancy and a 4.1 percent gain in average daily rate (ADR). PKF-HR is forecasting average quarterly revPAR gains of 4.9 percent during the second half of 2012. This is less than the estimated 6.9 percent revPAR growth enjoyed during the first six months of the year. “We are projecting a bit of a slowdown in performance during the second half of 2012. Some of the more critical uncertainties throttling demand growth will not be resolved until after the presidential election and decisions are made regarding tax legislation,” Woodworth said.
One of many economic measures monitored by PKF-HR is The Conference Board’s Leading Economic Index (LEI). “We believe there is a six to eight month lag between changes in the LEI and movements in lodging demand,” said Jack Corgel Ph.D., the Robert C. Baker professor of real estate at the Cornell University School of Hotel Administration and senior advisor to PKF-HR. “The decline in the LEI observed during the last quarter of 2011 suggested a softening in the demand for hotel rooms during the third quarter of 2012. However, the LEI bounced back nicely during the first half of 2012, thus perpetuating our optimism for 2013. Recoveries from economic recessions are usually not even.”
“While our outlook for near-term horizon has not changed, we are now projecting more robust ADR growth in the outer years,” Woodworth said. “From 2014 through 2016, we have increased our annual ADR growth rates by an average of 150 basis points. The solid growth in lodging demand exhibited in 2010 and 2011, combined with limited increases in hotel supply, will serve as the base for above long-run average occupancy levels from 2013 and beyond. Hotel managers should be able to leverage these market conditions and raise room rates.”
In 2012, 29 of the 50 Hotel Horizons markets are expected to achieve occupancy levels above their long-run average. With demand growth forecast to continue to rise greater than supply in most cities over the next two years, 42 of the 50 markets are projected to exceed their long-run average occupancy levels by 2014. With ADR driving revenue growth in the future, hotels have the opportunity to convert growth on the top-line revenue to strong gains on the bottom-line. Previous research conducted by PKF-HR has found that profit growth is greatest for hotels when revenue gains are driven by increases in ADR.
Luxury and upper-upscale properties achieved the greatest gains in revPAR during the initial stages of the industry recovery; however, going forward, PKF-HR believes the greatest gains in annual performance will shift to the more moderate-priced segments. “Capacity restraints and high ADRs at upper-tier hotels will force travelers to seek accommodation in the lower-tier properties,” Woodworth said.
In addition to mid-priced properties, hotel markets in the mid-section of the nation are starting to participate in the recovery. “The cities of Nashville, Houston, New Orleans and Salt Lake City are forecast to experience the greatest gains in demand in 2012,” Woodworth said. “The early stages of the U.S. lodging industry recovery favored the large gateway markets. The return of demand to cities in the nation’s midsection is a sign that the recovery is expanding beyond the Atlantic and Pacific coasts.”