The U.S. hotel occupancy rate will finally recover to pre-recession levels in 2014, according to the March 2014 edition of PKF Hospitality Research, LLC's (PKF-HR) Hotel Horizons report.
And for those worried about the supply of new lodging units outweighing demand, it doesn't look like that will be the case, at least for the next few years.
"Anyone that was around in the 1980s and 1990s remembers the dramatic negative impact overdevelopment can have on the lodging industry," said R. Mark Woodworth, president of PKF-HR. "Fortunately, we see a different scenario evolving during the current property cycle. According to Smith Travel Research, the long-run average annual change in supply has been 2.0 percent. We do not see the national annual supply growth exceeding that level until 2017."
In fact, in the next three years, supply is expected to be lower than historical averages.
"During past expansions, we have seen three to five consecutive years of 100,000 or more net new hotel rooms entering the market," Woodworth said. "Our current supply forecasts for the next three years are well below that threshold."
PKF-HR is projecting a 12.7 percent increase in unit-level hotel profits (NOI) in 2014, and a 14.5 percent jump in 2015. This will cap off a five-year run of double-digit gains on the bottom line, a span not seen since the 1970s.
Over the next two years, the inventory of hotel rooms in New York, Austin, Nashville, Pittsburgh, West Palm Beach, and Miami are all projected to increase in excess of four percent.
But Woodworth said these areas don't even have to worry.
"The relatively high construction activity in these locales might concern the hotel owners in these markets," he noted. "However, despite all the new rooms entering their cities, occupancy levels in New York, Austin, Nashville, Pittsburgh, West Palm Beach, and Miami are forecast to remain above their long-run average through 2018. This is an indication that current hotel development activity is being driven by market demand, not the artificial tax and financing incentives or excess liquidity that caused overbuilding during past recovery periods."
Interestingly enough, the greatest development activity is occurring in the upscale, upper-upscale, and upper-midscale segments. The upscale and upper-midscale categories contain most of the select-service, boutique, and extended-stay brands that are not only popular with developers and lenders, but consumers as well.
"Yet another difference between the current cycle and historical patterns are the types of hotels being built during this recovery," Woodworth said. "In the past, lower-priced, limited-service hotels were typically the first properties to be built following a recession, simply because they were the most affordable to construct. This time around we are seeing the greatest development activity in the upper-priced segments."
Strong increases in lodging demand continue to support the supply growth that is occurring. PKF-HR is forecasting the number of accommodated room nights in the U.S. to increase by 2.6 percent in both 2014 and 2015. With demand growth outpacing supply, the national occupancy level will continue to increase through 2015, resulting in six consecutive years of gains in this metric, per the report.
"According to Moody's Analytics, our macroeconomic forecasting agent, real personal income will continue to rise in 2014, while employment will finally return to pre-recession levels by the end of the year," said John B. (Jack) Corgel, PhD., the Robert C. Baker professor of real estate at the Cornell University School of Hotel Administration and senior advisor to PKF-HR. "Add in continued growth in business and consumer expenditures, and you have a good tasting recipe for generating lodging demand."
With occupancy levels rising, hotel managers should be able to be more aggressive with their pricing. PKF-HR is forecasting ADR to increase by 4.9 percent in 2014 and another 5.7 percent in 2015.
"As we know, ADR has a 20 percent greater effect on NOI change than occupancy," Woodworth said. "Therefore, with ADR driving revenue per available room (RevPAR) growth the next few years, we continue to view the current time period as one of the most profitable in the history of the U.S. lodging industry."
To purchase a March 2014 Hotel Horizons report, 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.
For the latest travel news, updates and deals, subscribe to the daily TravelPulse newsletter.
Topics From This Article to Explore
