PKF Hospitality Research: More Guests in 2010 --- With a Catch...

PKF Hospitality Research (PKF-HR) today announced that, according to an advance release of the September 2009 edition of Hotel Horizons®, nine consecutive quarters of declining lodging demand will come to an end in the second quarter of 2010.

“With the budgeting process underway at hotels around the U.S., the recovery of lodging demand is an important milestone that will be reached in the year ahead,” said R. Mark Woodworth, president of PKF Hospitality Research. “The catch; however, is that the practice of price discounting has firmly taken hold, and, as a result, room rates are expected to decline once again in 2010.”

Hotels that operate in the luxury, upscale, and midscale without Food & Beverage segments are expected to more customers beginning to re-appear in the fourth quarter of 2009. “While the price paid for the room will remain the most important criteria for most travelers in 2010, the value received will once again factor into the buying decision” Woodworth noted. “Higher-priced hotels have suffered the greatest erosion in pricing power during this protracted contraction and, as a result, offer an abnormally strong value proposition as the industry begins to turn the corner mid-way through 2010. We also believe that those property types that were the best performers before the recession are going to be those leading us out.” The two chain scales lagging the U.S. demand recovery will be midscale with Food & Beverage and economy, which will not see improved performance until the third quarter of 2010.

“Of the 50 markets monitored by PKF-HR, 45 will experience stronger demand in 2010 than in 2009,” Woodworth added. “It is important to note, however that supply increases are still an issue for hoteliers across the U.S., as 25 of our 50 markets will report further declines in occupancy, even with 20 of those 25 experiencing demand increases.” The five lagging markets are Fort Lauderdale, Indianapolis, Miami, Tampa, and Washington, D.C.


Budgeting Accuracy – What We Learned In 2002 & 2003

“During the two budgeting seasons following the post-9/11 period, every forecast and prediction had the business environment improving in the ‘next’ quarter, regardless of whether that next quarter was the second quarter of 2002, third quarter of 2002, or the fourth quarter of 2003. This optimism led to budget shortfalls, which continued until 2005,” Woodworth recounted. “Like times in our recent past, successful hotel owners and operators must be prepared to anticipate additional declines in certain metrics for 2010, which can be extremely difficult without guidance. Hotel Horizons® can help by bringing some clarity to the future outlook.”

Hotel Horizons® is a series of econometrically derived forecast reports developed by PKF Hospitality Research. The reports cover 50 of the largest U.S. hotel markets as well as the nation as a whole, and six chain scales. Economic forecasts by Moody’s Economy.com and historic hotel performance data and future supply pipeline information from Smith Travel Research are used to construct the industry’s most comprehensive forecasts of U.S. lodging market behavior.

Introducing: myShareSM

Since it is budget season, owners and operators are thinking about how their hotel will perform in 2010. Historically, the movement in a hotel’s occupancy and average daily rate from year to year can be largely explained by the movement of the overall market in which the property sits. “Our research over the past 10 years reveals that seventy-five to eighty percent of a hotel’s performance is systematically a function of changes in the larger market in which the property is located,” notes John B. (Jack) Corgel Ph.D., Senior Advisor to PKF Hospitality Research and the Robert C. Baker Professor of Real Estate, Cornell University School of Hotel Administration. “And who is better at knowing that remaining twenty to twenty-five percent than the local property owner or operator? The person in charge of the hotel knows when rooms will come in and out of service, when renovations occur, and when competitors open across the street.”

PKF Hospitality Research is introducing a new tool called myShareSM which helps managers incorporate the current PKF-HR forecast for their market into an estimate of the future performance of any submarket, competitive set, or their hotel. Included as a complimentary addition to all single market Hotel Horizons® reports, the myShareSM tool is an Excel-based application that comes pre-loaded with the respective Hotel Horizons® forecasts for all hotels, upper priced, and lower priced properties within a defined geographic market, as well as historic
submarket data from which to assist the user in calibrating penetrations. For more information, as well as a video demonstration of myShareSM, go to www.pkfmyshare.com

To purchase Hotel Horizons® forecast reports for the United States, or one of 50 individual markets, please visit the firm’s online store at www.HotelHorizons.com, or call (866) 842-8754.

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PKF Hospitality Research (PKF-HR), headquartered in Atlanta, is the research affiliate of PKF Consulting, a consulting and real estate firm specializing in the hospitality industry. PKF Consulting has offices in Boston, New York, Philadelphia, Washington DC, Atlanta, Miami, Indianapolis, Houston, Dallas, Bozeman, Sacramento, Seattle, Los Angeles, and San Francisco.

Forecast Change in Key Metrics, U.S. Lodging Industry

Year Occupancy ADR RevPAR Supply Demand
2009 -9.0% -10.4% -18.5% 3.0% -6.3%
2010 0.4% -3.1% -2.7% 1.2% 1.6%

Source: PKF Hospitality Research, September-November 2009 Edition of Hotel Horizons®
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PKF Forecasts 7.8 Percent RevPAR Decline in 2009

/PRNewswire/ -- U.S. hotels have entered the initial stages of one of the deepest and longest recessions in the history of the domestic lodging industry. The 7.8 percent drop in RevPAR that PKF Hospitality Research (PKF-HR) is now forecasting for 2009 will be the fifth largest annual decline in this important measure since 1930. Further, PKF-HR is forecasting that the nation's hotels will not experience a year-over-year quarterly increase in RevPAR until the second quarter of 2010. The projected seven consecutive quarters of declining RevPAR, beginning with the just reported third-quarter decline of 1.1 percent, according to data from Smith Travel Research (STR), marks the longest stretch of falling revenues endured by U.S. hotels since STR began tracking performance data in the late 1980s.

PKF-HR recently updated its forecast based on STR lodging performance data through September of 2008 and the November release of Moody's Economy.com economic forecast for the nation. The forecast results are presented in the fourth quarter 2008 edition of Hotel Horizons(SM), a quarterly series of reports containing five-year forecasts of performance for the U.S. lodging industry and 50 major markets across the country.

Mark Woodworth, president of PKF-HR, noted that, "the speed and severity of the downturns in employment and income continue to accelerate. Given the strong correlation between these two economic measures and demand for lodging accommodations, we are forecasting 2.5 percent fewer occupied rooms in 2009. This follows an estimated 1.0 percent decline in demand for year-end 2008."

The expected 2.5 percent fall off in demand, combined with a 2.9 percent increase in supply, will result in a 2009 year-end occupancy level of 57.6 percent. This represents a 5.3 percent decline in occupancy, and is 5.1 percentage points below the long-term average occupancy level for U.S. hotels tracked by STR of 62.7 percent. "The combination of above average net increases of supply occurring simultaneously with dramatic declines in demand is something we have not seen in recent industry recessions. This is what makes this downturn so severe," Woodworth said.

Discounting Impacts Profits

Through the first three quarters of 2008, U.S. hoteliers were holding the line against discounting despite declining levels of demand. In fact, room rates were up 3.7 percent through the first nine months of the year, a pace greater than the long-term average for ADR growth. "The severity of four consecutive down quarters of occupancy was too much for hotel operators to bear," Woodworth observed. "Starting in October 2008, we began to observe year-over-year declines in ADR. Given the expected deterioration of market conditions, we are forecasting a 2.7 percent decline in rates for 2009. This is just shy of the combined 2.9 percent decline in ADR suffered during the two-year period 2001 and 2002."

The ability to drive revenue by increasing room rates creates the most profitable environment for hotels. Therefore, the 2.7 percent fall in room rates leads to the projection of a 14.0 percent decline in net operating income (NOI) for the average U.S. hotel from 2008 to 2009. NOI is defined as income before deductions for capital reserves, rent, interest, income taxes, depreciation, and amortization.

"Looking back at previous industry recessions, we know that hotel managers will respond and cut costs," Woodworth said. "Fewer occupied rooms will reduce variable expenses such as payroll and operating supplies. In addition, management will eliminate some fixed overhead costs and non-essential guest services and amenities. Recent declines in energy prices will help this cost reduction effort." PKF-HR is forecasting unit-level operating expenses to decline by 4.5 percent in 2009, but this falls short of the 7.3 percent loss in revenue.

Fortunately for U.S. hotel owners and lenders, the vast majority of properties are fiscally fit entering the current downturn. Unit-level profit margins are estimated to be 29.4 percent in 2008, well above the 26.1 percent long-term average. Interest coverage ratios for the hotels in PKF-HR's Trends in the Hotel Industry exceed 1.7. While PKF-HR does not believe the current forecast will generate abundant hotel foreclosures and bankruptcies, operating conditions are at vulnerable levels and further deterioration could impact the solvency of U.S. hotels. "In view of the significant volatility in the domestic and global economy, a negative bias on this outlook is appropriate," noted Jack Corgel, the Robert C. Baker Professor of Real Estate at the School of Hotel Administration at Cornell University and senior advisor to PKF-HR.

Most Markets Will Suffer

"In keeping with our long-standing view that the lodging industry is a street corner business, we focused heavily on the outlook for the major hotel markets in the nation," Woodworth said. "We have developed 100 unique econometric forecasting models that project the performance of both the upper- and lower-tier properties in 50 of the largest cities in the country."

Except for New Orleans, all of the 50 markets analyzed by PKF-HR are forecast to suffer a decline in RevPAR in 2009. The main culprit for the decline in RevPAR is the forecast fall-off in demand. In 40 of the 50 markets, PKF-HR is forecasting a lower number of rooms to be occupied in 2009 as compared to 2008. In 18 of these markets, an above average increase in the supply of hotel rooms exacerbates the competitiveness of the marketplace.

"When analyzing the declines in RevPAR forecast for the nation's major markets, it certainly appears that warm-weather, leisure-oriented, and seasonal markets are most vulnerable in 2009," Woodworth observed. Five of the top seven forecast city declines in RevPAR are expected to occur within the State of Florida. The other two markets in the top seven are Phoenix and Oahu. "Further reductions in airline capacity amplify the negative operating environment in these markets brought on by weak economic conditions." Previous research by PKF-HR found that a 1.0 percent increase/decrease in airline capacity yields a 0.39 percent increase/decrease in lodging demand at the national level.

Beyond 2009

Come 2010, the relevant economic indicators are forecast to begin to drive lodging demand upward. This will happen simultaneously with diminished levels of new supply, thus resulting in gains in occupancy and, eventually, pricing power. "Given all the lodging industry will have to deal with in 2009, it is hard to look beyond a 12-month window. However, a glance at 2010 does reveal the beginning of an upward trend," Woodworth concluded.

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U.S. Hotels to Bottom Out in 2009

PRNewswire/ -- A new study released today by PKF Hospitality Research (PKF-HR) reveals that demand for U.S. hotel rooms will contract for the next two years. Compounding the negative impact of declining demand is a projected concurrent increase in supply. PKF-HR is forecasting a combined net increase in 2008 and 2009 of nearly 275,000 new hotel rooms compared to year-end 2007. This represents a 6.2 percent jump in accommodations over this two-year period.

With supply and demand levels moving in opposite directions, occupancy rates are projected to decline in both 2008 and 2009. Considering the 0.3 percent occupancy decline reported by Smith Travel Research in 2007, the result is three consecutive years of fewer accommodated roomnights for the average U.S. hotel.

These findings are based on the recently released third quarter 2008 edition of Hotel Horizons(SM), PKF-HR's quarterly forecast report for six U.S. chain-scales and 50 major markets. The forecast was released at The Lodging Conference 2008 in Phoenix this morning.

"Because of the extended slowdown of the U.S. economy, compounded by the negative consequences stemming from airline capacity cutbacks, we are now forecasting a 0.2 percent decline in lodging demand in 2008, followed by another loss of 1.1 percent in 2009," said Mark Woodworth, president of PKF Hospitality Research. "According to data from Smith Travel Research, this is the first time since 1988 that the U.S. lodging industry will experience two consecutive years of decline in lodging demand."

Slow ADR

Through the first half of 2008, the one saving measure for hotel owners and operators was the ability to maintain rate integrity. Despite a 2.5 percent decline in occupancy during the first six months of the year, managers were able to raise their average daily room rates (ADR) by 4.2 percent. Persistent yield management plus contractual rate agreements helped to buoy room rate levels.

"With supply and demand moving in opposite directions, the typical hotel manager will not be able to maintain their aggressive approach to raising room rates," Woodworth commented. "Accordingly, we are forecasting ADR growth for the entirety of 2008 to be 3.6 percent, followed by a minimal 1.3 percent gain in 2009." Looking forward, PKF-HR does not foresee ADR growth to exceed the pace of inflation until 2012, according to Woodworth.

Declining occupancy, plus slow ADR growth, combines for a dismal near-term outlook for revenue increases. PKF-HR projects RevPAR to increase a mere 0.8 percent in 2008, followed by a 3.2 percent decline in 2009. Given the strong contribution of rooms revenue, PKF-HR is forecasting total hotel revenues to remain virtually flat in 2008 (0.2 percent increase) and then decline in 2009 (negative 2.5 percent).

Expense Controls

"Historically, U.S. hotel managers have answered reductions in revenue with more vigilant cost containment. Fewer rooms occupied do lessen the need for staffing, plus inspire management to find expense reductions throughout the operation. Unfortunately, less controllable costs, such as utilities, property taxes and insurance, are on the rise," Woodworth noted.

PKF-HR believes that average operating expenditures will drop 1.0 percent in 2008, thus allowing unit-level net operating income (NOI) to increase 3.1 percent. However, the forecasted 2.5 percent decline in revenue for 2009 will be too much to overcome. Despite another 2.3 percent reduction in operating costs, the average U.S. hotel is projected to suffer a 3.0 percent decline in NOI during 2009. For the purposes of this analysis, NOI is defined as income before deductions for capital reserve, rent, interest, income taxes, depreciation and amortization.

"Fortunately, the U.S. lodging industry was in good financial shape entering the current trough in the business cycle. Unlike other forms of real estate, lodging was not experiencing any material amounts of foreclosures," Woodworth said. "A sample of 1,500 hotels that participated in our annual Trends in the Hotel Industry survey generated sufficient cash from their operations to cover their reported interest payment by a ratio of 1.86. This implies that most U.S. hotels can withstand a fairly substantial decline in NOI and still have the ability to meet their debt service obligations."

On The Horizon

"The current credit crisis may be unfairly punishing developers with sound market and financially justified projects. However, the lodging industry will eventually benefit from the near-term development difficulties," Woodworth noted. "PKF-HR believes the existing restrictive financing environment will linger into 2009, thus delaying or preventing the start of hotel projects currently in the pipeline. Given the 12 to 24 month time needed to construct most hotels, PKF-HR projects a window of one to two years when the amount of hotel openings will be very limited. The pace of new supply growth is forecast to drop to 1.4 and 1.8 percent, respectively, in 2010 and 2011.

"By 2010, we will start to see a reversal of current trends. While the pace of supply growth will be waning, we will start to see a return in the demand for lodging accommodations," Woodworth said. PKF-HR is forecasting a 2.2 percent increase in demand for 2010, followed by another 3.1 percent gain in 2011. With growth in demand exceeding supply, national occupancy levels will begin to rise again in 2010 and continue to increase through 2012.

Despite the forecast of growth in occupancy from 2010 through 2012, the outlook for increases in ADR is somewhat constrained. "As we have observed during the initial years of historical periods of recovery, occupancy gains precede ADR growth. Given the depth of the projected lodging industry slowdown in 2009, the newly built competitive properties added to most markets, and forecasts of below average CPI growth, we are forecasting average daily room rates to increase at a compound average annual rate of 2.7 percent, just equal to the long-term rate of growth for ADR," said Woodworth.

A Trough In 2009

"Seven years since the terrorist acts of 2001 -- the primary event that led to the last low point in the U.S. lodging performance -- a new, but familiar, set of circumstances is propelling the industry towards the next trough. Capital market turmoil is undermining asset values, a situation last seen in the late 1980's and early 1990's. The projected industry slowdown won't be as deep as the ones observed in 1981 or 1991, but it may take a little longer to fully recover," Woodworth concluded.

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Caribbean Hotels Face Several Threats In 2008

PKF Hospitality Research (PKF-HR), an affiliate of PKF Consulting, today announced that it has released its 2008 edition of Caribbean Trends in the Hotel Industry. The report finds that the Caribbean hotel industry faces some strong challenges going forward. After a soft 2006, most Caribbean destinations saw their visitation rates grow in 2007. In 2008, however, the combination of a slow U.S. economy, increased competition, rising energy costs, and threats of reduced air service could result in lower levels of occupancy and profits for the region’s hotel owners and operators.

“Given the region’s dependence on airlift, the most daunting issues facing the Caribbean hotel industry are the rising cost of airfares and the announced cutbacks in air service,“ said Scott Smith, MAI, senior vice president in the Atlanta office of PKF Consulting. “Due mostly to the rising cost of fuel, four of the five leading air carriers to the Caribbean have announced cutbacks in service. Puerto Rico and the Dominican Republic could see as many as 26 percent fewer flights in December of 2008 compared to December 2007.” In an effort to maintain air service, the Puerto Rico Port Authority is offering to reduce airport fees by 45 percent.

Not only is the reduced air capacity a concern, but so are rising airfares. “The Caribbean has always been attractive to price-sensitive travelers. If airfares continue to rise, hotels may have to reduce their room rates in an effort to maintain the Caribbean’s position as an affordable destination,” Smith said.

Airlines are not the only mode of transportation impacted by the rise in energy costs. The relatively low cost of Caribbean cruises has made the region the number one cruise market in the world. “Despite the strength of the market, we have seen shifts in the cruise industry that have been influenced by the rising cost of fuel. Cruises to more remote ports in the southern Caribbean, such as Aruba, are being cut from itineraries due to the length of the trip and fuel required to get there,” Smith noted.

Energy Costs

The rising cost of energy is not only impacting transportation, it has perpetuated the high cost Caribbean hotels have to pay for utilities, as well. Utility costs for the average property in the Caribbean Trends sample were 7.3 percent of total revenue, or $8,341 per available room in 2007. This compares to just 3.6 percent, or $3,868 per available room, for comparable U.S. resorts.

In an effort to offset the rising cost of energy, some Caribbean hotels have instituted energy surcharges. Most people believe this is not a permanent solution. The buzz word in the region is to “go green.”

“To preserve the natural beauty of the region, Caribbean resorts have had a long history of being environmentally friendly,” Smith commented. “Hotel operators are now parlaying this experience into energy conservation. In addition to installing cost-cutting equipment, such as efficient light bulbs, showers, toilets, sinks, and air conditioning, Caribbean hoteliers are working with their local energy providers to develop new sustainable technologies. This will not only reduce the cost of operations, but improve the overall economy of the island on which they operate.”

New Competition

Another challenge to Caribbean hotels is the anticipated growth in competitive supply predicted over the next few years. Most major international brands have extensive plans to increase their presence in the region. The World Travel and Tourism Council estimates that more than $100 billion has been committed to the development of new hotels in the Caribbean over the next five to six years.

“If you profile the hotel projects that are currently under construction there, you’ll find a preponderance of luxury and upper-upscale properties,” Smith observed. “Like the recent trend in the United States, most of these projects are resorts with a significant residential component and first-class spa.”

Caribbean properties will not just face new competition from within the region. Hotel construction is flourishing throughout Latin America. “Belize and Costa Rica are two markets that are becoming increasingly competitive with the Caribbean as a vacation destination for U.S. citizens, as well as travelers from Europe and South America,” Smith said.

Operating Costs

For the third consecutive year, PKF-HR compared the financial performance of Caribbean hotels with comparable U.S. resorts. The observations continue to be consistent.

“Historically, Caribbean hotels have enjoyed the benefit of paying their employees relatively low salaries and wages. However, due to rising standards of living among the islands, we have started to see a closing of the gap between U.S. and Caribbean labors costs,” Smith noted. Caribbean hotels continue to pay less property taxes than their U.S. counterparts. This is attributable to the level of government subsidies tourist-related businesses frequently receive.

Utility costs are not the only expense that is extraordinarily high for Caribbean hoteliers. “Because of their isolated locations, hotels in the Caribbean need to import the majority of their food and beverage items. Accordingly, the profit margins in this department are lower than would be expected within the United States,” Smith observed. “In addition, Caribbean insurance costs continue to exceed the U.S. average due to the constant risk of hurricanes.”
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PKF Study Finds U.S. Hotels Extremely Vulnerable To Sharp Declines In Airline Capacity

According to the latest analytical data from PKF Hospitality Research (PKF-HR), U.S. hotels could face a decline in lodging demand greater than that experienced during the turmoil following the terrorist attacks on September 11, 2001. Under a worst-case scenario, a 1 percent decline in the number of seats flown within the U.S. will result in a 0.39 percent decline in the demand at the nation’s hotels. These findings come from an in-depth econometric analysis performed by lodging experts PKF Hospitality Research.

“Many industry participants have been speculating about the spillover effect a deteriorating airline industry will have on hotels,” said Mark Woodworth, president of PKF Hospitality Research. “Our research measured the historical relationship between these two components of the travel industry. This allowed us to project just how much business hotels stand to lose given the cutbacks in capacity announced by the major airlines.”

Using historical data from Smith Travel Research, Moody’s Economy.com, and the Department of Transportation, and controlling for the effects of changes in income and employment, PKF-HR found what many intuitively believe: a highly significant relationship exists between available seats and hotel room night demand.

“Based on our findings that a 1 percent decline in available airline seats results in a 0.39 percent decrease in hotel demand, if airline capacity is reduced by 10 percent as some have suggested, then lodging demand would fall off 3.9 percent. To put this in perspective, the decline in lodging demand experienced in 2001 was just 3.3 percent,” Woodworth noted.

Given PKF-HR’s second quarter Hotel HorizonsSM forecast for 2008, a 3.9 percent reduction in lodging demand for the year would translate into approximately 40 million fewer room nights occupied, or $4.3 billion in revenue, on an annual basis. “With losses like this, hotel operators would be forced to make drastic cutbacks in staffing and other operating costs,” Woodworth concluded.

Several factors, however, suggest that the decline might not be quite so bad. “As one would expect, the airlines are eliminating those flights that are in least demand and lowest in fuel efficiency. Some portion of the demand that would have booked a flight that is no longer available will simply adjust the timing of their travel plans. Trips will still be made,” Woodworth noted.

Location and Rate Matter

“Just as we have observed during the ebbs and flows of the normal lodging cycle, the reaction of U.S. hotels to a major economic shift will differ based on a variety of factors,” he added.

Statistically speaking, the PKF-HR regression analysis found that Miami, Orlando, Phoenix, and Denver have historically shown the most significant relationships between airline seats and lodging demand. This indicates that these cities are the most sensitive to changes in airline service. “What these markets have in common is that they are either major leisure destinations, or geographically situated in an isolated location away from other major metropolitan areas,” said John B. (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. “Conversely, cities that are very economically diverse, or those that are easily accessible from other metro areas via automobile or train, are best positioned to withstand cutbacks in airline capacity. Most of the major cities along the two coasts fall into these categories.”

Pricing levels also dictate the vulnerability of hotels to changes in the airline industry. In general, properties in the highest and lowest rated chain-scales are least susceptible to movements in airline capacity, while those in the middle stand to lose the most. “Historically, the performance of luxury hotels and budget-oriented motels is largely insensitive to changes in airline capacity. Conversely, lodging establishments in the upscale and midscale without food and beverage categories have exhibited the greatest historical vulnerability to changes in the airline industry. These two lodging segments are popular with mid-level business and leisure consumers that don’t have quite the economic insulation of executive luxury travelers, or the bare-bones budget of construction crews and thrifty trekkers,” Corgel said.

Conclusion

“Given what is happening in today’s economy, there are many moving parts influencing the performance of hotels. What we at PKF-HR have accomplished is isolating the direct impact of the airline industry on lodging, as opposed to the downward pressures on hotel demand caused by the credit crisis, rising gas prices for automobiles, and declining consumer confidence,” Woodworth stated. “If significant reductions to airline capacity do occur, the potential exists for an extremely negative impact on U.S. hotels. The impact will vary by geographic location and property orientation, but will be hard to completely avoid no matter where, or who, you are.”