Turnaround for Most Major Hotel Markets to Commence in Third Quarter 2002 - HRG and TWR Expect Recovery by Late 2003

Revenue per Available Room (RevPAR) growth, a key industry performance measure, is forecast to turn positive in the fourth quarter of this year and will increase at record levels in 2003. The experience, however, varies significantly by both market area and property type. The turnaround for full-service hotels (defined as the quarter in which RevPAR change turns positive) is expected to be in the third quarter of 2002 (2002:3) in eight of the top ten domestic markets (measured in terms of the number of available, chain-affiliated rooms). The exceptions are Dallas, which is forecast to recover in the second quarter of 2002 (2002:2), and Chicago, which should turn around in fourth quarter of 2002 (2002:4). The attached exhibit summarizes forecast turnaround and recovery dates for the top U.S. metropolitan markets.

"Because the business sector of the economy continues to lag the consumer sector," noted Ray Torto, Ph.D., Principal of TWR, "property types and markets that are more dependent on the business traveler will take longer to recover." TWR and HRG define recovery as the 3rd quarter during which the forecast RevPAR level exceeds the average of its 3rd quarter levels in 1999 and 2000.

"We believe that the average of these two historical points in time reflects market equilibrium in the majority of the major cities that we track," noted Jack Corgel, Ph.D., Managing Director of Applied Research for HRG. "While six of the top ten markets that we track are forecast to recover in 2003:3, two, Houston and Washington, D.C., will recover in 2002:3," Corgel noted. Because of their comparatively severe declines, Boston and Chicago are forecast to experience a much more protracted recovery period.

The turnaround for limited-service hotels is expected to occur in the third quarter of 2002 in only four of the top ten domestic markets. Nashville, largely because of weak market conditions prior to 2001, is forecast to turn around in 2002:2 whereas Detroit is not expected to experience a RevPAR turnaround until 2004:1.

"Accelerated new construction of limited-service hotels will prolong the recovery period in some markets," noted Torto, "while overall weak demand conditions will undermine improved performance in others."

According to Corgel, "the strength of the Houston market is such that limited-service properties there have already recovered. However, we anticipate that soft demand conditions in markets such as Charlotte and Detroit will result in a recovery period exceeding six years."

Air Travel Stigma is Dissipating

"Unless the government's first quarter GDP estimate is largely inaccurate, it appears that the overall economic environment can hardly be considered recessionary," stated Petros Sivitanides, Ph.D., Senior Lodging Analyst at TWR.

"Yet, the fate of the nation's hotel market is still being challenged by a poor business environment and, to some extent, by the effects of 9/11."

HRG/TWR take heart in that the market is improving and the negative effects of 9/11 on the nation's lodging demand have diminished considerably during the first quarter of 2002.

The researchers have factored what they call the "stigma effect" into their projections. This effect refers to the reduction in lodging demand because of psychological and emotional barriers to travel created by the terrorist attacks. The air-travel "stigma effect" on the nation's lodging demand fell from 10.1 percent in the fourth quarter of 2001 to only 3.4 percent in the first quarter of this year.

According to Corgel, "These figures reflect the pure stigma effect since our estimates control for the effect of the economy on lodging demand." According to HRG/TWR estimates, the stigma effect inflicted on lodging demand during September 2001 contributed to roughly 25 percent of the decrease in demand.

Increasing RevPAR Does Not Always Result in Higher Profits

While the updated forecasts from the HRG/TWR Summer 2002 Hotel Outlook report anticipate an accelerated recovery schedule relative to that anticipated in their Spring 2002 Outlook report, most operators continue to struggle in their efforts to maintain current profit levels.

"Based on the data compiled in our 2002 Trends Report," noted Mark Woodworth, Executive Managing Director of HRG, "the average hotel in our sample experienced a 19.4 percent decline in profits in 2001." Although RevPAR levels are expected to turnaround this year, additional profit declines are expected in 2002.

HRG/TWR forecast that the overall occupancy level for their sample of the 75 largest markets in the U.S. will increase by 1.4 points in 2002 (relative to 2001). This will be offset, however, by a 2.6 percent decline in average daily rate, thus yielding a 0.4 percent decline in RevPAR for the year. "Given this outlook, the average hotel manager will sell more rooms overall this year than last" noted Woodworth. "However, these rooms will be sold at a lower price point, and the typical manager will incur more costs because of the higher occupancy. Because of this, along with the normal level of expense inflation that will occur, we expect further deterioration in unit-level profits this year."

Torto noted that "the good news is that the industry has bottomed out, and the light is clearly visible at the end of the tunnel as the U.S. economy improves."

The Hospitality Research Group (HRG), headquartered in Atlanta, is the research affiliate of PKF Consulting, the international consulting and real estate firm specializing in the hospitality industry. HRG, along with PKF Consulting and the PKF Consulting Capital Markets Group, are wholly owned subsidiaries of Hospitality Asset Advisors International, a U.S. Corporation. HAA International has offices in New York, Boston, Philadelphia, Washington DC, Atlanta, Houston, Dallas, Los Angeles, San Francisco, and Singapore.

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