PKF Forecasts 7.8 Percent RevPAR Decline for the U.S. in 2009
No Relief Until Second Quarter of 2010
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."
U.S. Lodging Industry Greatest All Time Annual Declines in RevPAR Year Change In RevPAR 1932 -24.7% 1931 -18.0% 2001 -10.3% 1949 -8.2% 2009 Forecast* -7.8% 1933 -7.6% 2002 -4.6% Note: * Fourth Quarter 2008 Hotel Horizons(SM) Report Source: PKF Hospitality Research U.S. Lodging Industry Forecast* Change In Performance 2008 to 2009 Measure Change Supply 2.9% Demand -2.5% Occupancy -5.3% ADR -2.7% Rooms RevPAR -7.8% Unit-Level Total Revenue -7.3% Unit-Level Expenses -4.5% Unit-Level NOI** -14.0% Note: * Fourth Quarter 2008 Hotel Horizons(SM) Report ** Before deductions for capital reserve, rent, interest, income taxes, depreciation, and amortization. Source: PKF Hospitality Research 50 Major U.S. Lodging Markets Number of Cities Forecast* To Experience Year-Over-Year Decline Measure 2008 Estimate 2009 Forecast 2010 Forecast Cities - Decline in ADR 4 33 16 Cities - Decline in Demand 29 40 5 Note: * Fourth Quarter 2008 Hotel Horizons(SM) Report Source: PKF Hospitality Research U.S. Lodging Markets Greatest and Least 2009 Forecast Change in RevPAR Market Change In RevPAR New Orleans 0.2% Pittsburgh -0.9% Seattle -1.3% San Francisco -1.6% National Average -7.8% Ft. Lauderdale -10.3% Orlando -11.1% Phoenix -11.2% Miami -12.9% Note: * Fourth Quarter 2008 Hotel Horizons(SM) Report Source: PKF Hospitality Research
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.
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.
To purchase Hotel Horizons(SM) reports for the United States, or one of 50 individual markets, please visit the firm's online store at www.pkfc.com/hotelhorizons, or call (866) 842-8754 .
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, Indianapolis, Houston, Dallas, Bozeman, Sacramento, Seattle, Los Angeles, and San Francisco.
Mark Woodworth (CBRE)
Senior Managing Director
Phone: +1 404 812 5085