Lower-priced hotels held RevPAR levels in 2003, while pricier hotels endured another year of RevPAR decline. Supply side changes played a major part in this trend, as limited-service hotel construction slowed considerably over the past 24 months.

By Rod Clough, MAI, February 26, 2003

Mid-price, economy, and budget hotels continued to hold RevPAR levels in 2003, while luxury and upscale hotels endured another year of decline. RevPAR is the rooms revenue collected per available hotel room; one method of calculating RevPAR is to multiply a hotel's occupancy rate by its average room rate.

Supply side changes played a major part in this trend, as limited-service hotel construction slowed considerably over the past 24 months. According to Smith Travel Research (STR), supply changes in mid-price, economy, and budget categories was noted at only 1.2%, 0.0%, and -0.4%, respectively, in 2003. Conversely, luxury and upscale hotel room supply increased by notable levels of 2.5% and 2.2%, respectively, in 2003. Therefore, while RevPAR trends were contracting for upscale and luxury hotels overall, rooms revenue actually collected increased by 2.1% and 1.3%, respectively, in 2003. This is illustrated in the following table.

The stability in new supply within the lower price-points allowed lower-priced hotels to see a net benefit from their marketing efforts towards travelers on a tighter travel budget. The following chart illustrates historical occupancy levels for these price categories over the last six years.

Occupancy Comparison by Price Category (STR)

Mid-price and economy hotels realized slight occupancy increases in 2003, while budget hotels traded some occupancy overall for a greater 1.3% increase in room rate. Taking into consideration changes in supply, actual rooms sold increased by a more significant 1.8% for mid-price hotels, while remaining stable for economy hotels and declining by 0.7% for budget hotels.

The following chart illustrates historical average rate levels for these price categories over the last six years.

Average Rate Comparison by Price Category (STR)

As noted, budget hotels achieved the best overall average rate increase in 2003, at 1.3%; economy hotels also benefited from a stable rate position. All other price categories realized rate contraction between 0.6% and 1.0%.

Therefore, the greatest percentage increase in RevPAR was realized in lowest-priced budget hotels category, which realized an improvement to $23.27 from $23.04, according to STR. STR also reported RevPAR levels of $28.65 and $39.11 for the economy and mid-price segments, just slightly higher than the 2002 levels. The following chart illustrates historical RevPAR levels for these price categories over the last six years.

RevPAR Comparison by Price Category (STR)

As fewer limited-service supply additions are expected again in 2004, we expect to see the recovery accelerate - primarily in average room rates. Our recent experience in economy-priced markets shows that hotel managers of limited-service hotels are generally expecting $1.00 to $2.00 increases in average room rates this year. Those owners which have kept their hotels in good condition over the past three years and those with the strongest brand name affiliations and locations will be able to command the greatest increases, some even above the noted range. Along with average rate increases, some occupancy improvement is also expected which should concurrently lead to notable RevPAR gains.

Budget hotels may see some business erosion this year, as the economy gains momentum and travelers trade up for economy and mid-priced hotel products. Moreover, hotels which have deteriorated over the past several years will continue to trade down to budget brand names and price points, as economy and mid-price brands no longer suit their property condition.

However, as some markets see the oldest budget hotels - those typically in the poorest condition and accordingly weighting down market averages - being closed and removed from inventory, the budget hotels in good enough condition to remain competitive should realize a net gain.

Rod Clough, MAI, oversees the activities of the HVS Texas office. Rod worked in both the New York and Colorado offices prior to launching the Texas operation. His experience is extensive with all hotel property types and brand segments, including convention headquarters hotels, conference center hotels, golf and spa resorts, commercial limited-service and full-service hotels, and extended-stay hotels. In addition to serving financial institutions and developers, Rod has extensive experience working with municipalities and government-related organizations on their hotel-related endeavors. Rod is a Designated Member of the Appraisal Institute and is a state certified general appraiser. More...

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