More Guests In 2010*
*with A Catch…
PKF-HR relies on Moody’s Economy.com for guidance on macroeconomic variable movements. Their forecasts are effectively translated into future lodging industry performance through a set of proprietary econometric models maintained by PKF-HR. These models rely heavily on the movements of Total Employment and Real Personal Income to predict future lodging industry demand.
Total Payroll Employment expectations have changed slightly from the Hotel Horizons® forecast released in June 2009. Employment levels for the second quarter were 200,000 jobs higher than previously predicted (132.1m vs. 131.9m jobs), but that difference diminishes to only 18,000 jobs higher by the end of 2009. Although the official end of the recession is expected to arrive in September 2009, the jobs market will not reach its trough until the second quarter of 2010, and will be 254,000 jobs less than previously predicted (130.5m vs. 130.8m). That difference continues with a less robust job recovery throughout 2011.
Lodging demand as a function of employment has historically experienced a positively elastic relationship of 1.2, or more generally speaking, when employment moves by a factor of 1, lodging demand will move by a factor of 1.2. Therefore, the less than optimal employment forecast detailed above indicates the lodging demand recovery will be somewhat more protracted than predicted in previous reports.
Economics Impact Demand
Because of deterioration in the outlook for domestic employment, PKF-HR has adjusted its forecast for the U.S. lodging industry downward from the June 2009 edition of Hotel Horizons®. As of August 2009, PKF-HR is forecasting a RevPAR decline of 18.5 percent for the year, the result of a 9.0 percent decrease in occupancy and a 10.4 percent fall off in average daily room rates. The 18.5 percent decline in RevPAR is the largest annual contraction recorded by PKF-HR since 1932.
The reduction in demand for accommodations caused by the economic recession, combined with a rise in the competitive supply of hotel rooms, continues to exacerbate the problems that challenge lodging industry owners and operators. PKF-HR’s forecast of a 6.3 percent decline in lodging demand for 2009 is another long-run record low, and the forecast of a 3.0 percent rise in supply is nearly one percentage point above the long-term average.
Moody’s Economy.com believes that economic conditions will improve enough in 2010 such that we anticipate a 1.6 percent increase lodging demand. This lift will surpass the 1.2 percent increase in supply, resulting in a 0.4 rise in the annual occupancy rate. Unfortunately, the low occupancy annual level (55.2%) will continue to induce discounting. Therefore, average room rates are projected to drop another 3.1 percent. The net result is a forecast 2.7 percent decline in RevPAR during 2010.
Impact on Chain Scales
Hotels that operate in the luxury, upscale, and midscale without food and beverage segments are expected to see more customers beginning to re-appear in the fourth quarter of 2009. While the price paid for the room will remain the most important criteria for most travelers in 2010, the value received will once again factor into the buying decision. Higher-priced hotels have suffered the greatest erosion in pricing power during this protracted contraction and, as a result, offer an abnormally strong value proposition as the industry begins to turn the corner mid-way through 2010. We also believe that those property types that were the best performers before the recession are going to be those leading us out. The two chain scales lagging the U.S. demand recovery will be midscale with food and beverage and economy, which will not see improved performance until the third quarter of 2010.
Impact on Local Markets
Of the 50 markets monitored by PKF-HR, 45 will experience stronger demand in 2010 than in 2009. It is important to note, however that supply increases are still an issue for hoteliers across the U.S., as 25 of our 50 markets will report further declines in occupancy, even with 20 of those 25 experiencing demand increases. The five lagging markets are Fort Lauderdale, Indianapolis, Miami, Tampa, and Washington, D.C.
To purchase Hotel Horizons® forecast reports for the United States, or one of 50 individual markets, please visit the firm’s online store at , or call (866) 842-8754.
Director of Research Information Services