Branded Hotel Occupancy To Rise During 2003 - PKF Reports

"The recovery cycle of the branded hotel market appears to be following a logical and formerly-observed pattern. History has shown that once long-run occupancy is reached, which is expected in 2004, room rates rise, and development follows," noted Jack Corgel, Ph.D., Managing Director for HRG.

The forecasts reveal that chain-affiliated occupancy is expected to rise towards long-run average levels in 2003, while ADR is predicted to remain flat. Occupancy is forecast to increase by a moderate 2.8 percentage points and a very slight 0.9% increase is forecast for average daily rate (ADR) during 2003. As a result, Revenue-Per-Available-Room (RevPAR) growth, a key industry performance measure, is forecast to turn positive in 2003 and increase 5.5% by year-end, which is only slightly lower than the previous increase forecast by the HRG/TWR model. The bulk of this RevPAR growth should happen in the second half of 2003, as the first two quarters of the year are expected to register an average RevPAR increase of only 2.8%.

Occupancy is expected to register strong increases in 2003 and 2004 and then experience a slowing growth rate as long-run stability is reached in 2005. As occupancy moves towards equilibrium, increases in ADR are forecast to rise in 2004 and 2005. Historically, development of new hotels resumes after this occupancy-followed-by-rate pattern of increase materializes.

Hotel Room Prices Will Remain Attractive Through Most of 2003

Hotel room rate declines are expected to finally stop by the end of 2002 and remain stable through 2003. Slight growth is expected in ADR in the second half of 2003. This will be followed by reasonable room rate growth in 2004 and 2005.

Forecasts Differ by Segment

The 2003 outlooks for full and limited-service segments of the hotel market differ. "The full-service segment is expected to grow strongly from 2003 through 2005 with RevPAR increases ranging between 6% and 10%. The recovery of the limited-service segment will be similarly strong, but won't start until 2004," states Petros Sivitanides, Ph.D., Vice President for Research at TWR. During 2003, occupancy for the chain-affiliated full-service market is forecast to increase by 3.5 percentage points, while ADR is forecast to remain relatively flat. The resulting near-term outlook for the chain-affiliated, full-service segment is RevPAR growth of 6.2% in 2003.

The outlook for the branded limited-service market is slightly less optimistic, as RevPAR is projected to increase by only 2.3% during 2003. Limited-service occupancy is forecast to increase by a slight 1.6 percentage points, and ADR is forecast to remain more or less flat.

Quick Adjustment to Changes in the Economy

The HRG/TWR forecasting models also reveal that most movements in the general economy are reflected in the demand for chain-affiliated hotel rooms during the same quarter as they occur. As a result, hotels with brands should benefit by the end of 2003 from momentum building in the economy.

"According to Smith Travel Research monthly reports, chain-affiliated hotels have been impacted the most during this economic downturn. These properties will likely experience the earliest and strongest rebound in percentage terms," Corgel adds.

The updated forecasts take into account not only the effects from the economy, but also the negative impact of the remaining portion of the stigma effect imposed upon the air travel industry as a result of the September 11 terrorist attacks. Air travel stigma refers to the fear of injury and death from becoming involved in terrorist attacks and war, emotional disturbances associated with following new procedures for air travel, and reemerging fears of airplane safety stemming from the weakened financial position of the airlines. While this stigma effect has decreased, it seems to still hamper lodging demand to some extent.

The prospect of a war with Iraq also creates great uncertainty in the lodging market. Using the Gulf War experience that occurred in the first quarter of 1991 and assuming a short war would take place in the second quarter of 2003, the HRG/TWR analysis shows that a war with Iraq will have varying consequences within the branded lodging market. The chain-affiliated, full-service segment would be negatively affected by a war, while a war would have a negligible impact on the branded limited-service segment. In particular, forecasts suggest that at the national level, a war lasting approximately one quarter during the first half of 2003 would reduce expected RevPAR growth during the second quarter of 2003 to practically zero. * * *

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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