NEW YORK / Try this conundrum on for size: Hotels are continuing to perform for investors, but there will probably be no additional room at the inn for travelers visiting New York, Chicago or San Francisco for the foreseeable future.

After a year of record profits, the U.S. lodging industry is expected to continue its moderate upward profit trend well into the year 2000 - but at a slowing rate of growth. The prognostication is one of the findings in the upcoming National Lodging Forecast issued by Ernst & Young's Hospitality Services Group.

In a preliminary look at the forecast, Ernst & Young analysts point to historically low interest rates and successful product re-engineering efforts by leading lodging companies as reasons to believe that profits will continue to head upward for at least the next 12 months of operations. They warn, however, that the industry as a whole is nearing its peak performance levels. "Profit growth will still exist, but growth will moderate, increasingly becoming more a function of efficient expense management and process re-engineering than aggressive revenue growth, " the forecast says.

The E&Y report also said the lodging industry is expected to generate record profits of over $22 billion in 1999. The projection for this year is based on estimated average occupancy rates of 63.4 percent and estimated average daily rates of approximately $82. "Interestingly," says the study, "compared to 1998, the projections for 1999's performance include an estimated 0.6 point decrease in occupancy and 4.3 percent increase in average rate.

The same general trend holds true for the year 2000 as well. The 2000 forecast is for the industry to again see a slightly lower overall occupancy rate of 63.1 percent (down .3 points from 1999) but at an estimated average rate of $85 - a 4 percent increase over 1999.

While demand for hotel rooms has steadily climbed in the past several years, a combination of two factors - significant new supply and hoteliers' focus on raising room rates - have actually reduced

overall occupancy levels. On the other hand, while occupancies are decreasing, gains in average rate have helped to maintain positive revenue per available room (RevPAR) growth. This has helped provide investors with solid gains in recent years.

According to forecast editors, overall industry RevPAR is expected to increase an estimated 3.3 percent this year and an estimated 3.2 percent in 2000, which would be above Consumer Price Index (CPI) expectations for the year 2000.

In spite of what is considered to be "consistent performance" by most investors, the continued depression in lodging stock valuations has forced many companies to seriously consolidate their operations to improve efficiency during the past year. "Although Wall Street's love affair with hotel-concentrated real estate investment trusts (REITs) ended last year - and REIT equity values continue to under-perform compared to the market as a whole - under-valuations of hotel assets are encouraging REIT management to seriously consider limited equity buybacks and even some full-fledged privatizations even though such a process is difficult and costly to achieve given the diffuse REIT ownership structure," says the forecast.

For business travelers waiting for rooms to open up in tight markets like New York and San Francisco, the lack of support by capital market sources is not likely to change room availability any time soon.

"It appears that Wall Street also put the brakes on lending for the lodging industry out of fears of overbuilding and a general economic slowdown, even though those fears went largely unrealized and the economy, and lodging industry fundamentals, continue along much the same positive path as before," say forecast authors. The study also says that overbuilding has been a special concern especially in the limited-service sector of markets like Atlanta and Dallas. On the other hand, the aggressive supply of new units in other markets such as Orlando will continue to be met by increasing demand.

The E&Y Kenneth Leventhal Real Estate Group is a business unit of Ernst & Young LLP. Ernst & Young LLP provides assurance and advisory business services, tax services and consulting for domestic and global clients. The firm has 30,000 people in 87 U.S. cities. Visit the Ernst & Young web site at or the E&YKL website at www.ey.com/realestate.

Andrew Neily
(925) 930 9848
Gallen Associates