ADR Growth Leads Cities Out Of Recession
In the December 2009 edition of Hotel Horizons®, PKF Hospitality Research (PKF-HR) is forecasting a third consecutive year of declining revenue per available room (RevPAR) for U.S. hotels in 2010. By year end 2010, PKF-HR projects that the average U.S. hotel will suffer a 1.1 percent decline in RevPAR, the net result of a 0.4 percent gain in occupancy, but a 1.5 percent decline in average daily rate (ADR).
When reviewing the performance forecasts for 50 of the largest U.S. markets for which PKF-HR prepares a Hotel Horizons® report, we observe a different scenario for 2010. The December 2009 Hotel Horizons® forecasts for these 50 cities call for an aggregate increase in RevPAR of 0.6 percent. Unlike the national forecast, hotels in the largest U.S. cities should experience a slight decline in occupancy (-0.1 percent), but enjoy a 0.7 percent gain in ADR.
The following paragraphs summarize the reasons behind the divergent path for the nation’s major hotel markets, as well as highlight the projected top and bottom performers by industry measure.
Supply/Demand
The major metropolitan areas have historically been the preferred location for hotel development in the U.S. According to Smith Travel Research, and for the period 1998 through 2008, the supply of hotel rooms grew at a compound annual rate (CAGR) of 2.0 percent for the nation as a whole. Within the larger cities, the supply CAGR was 2.6 percent. For 2010, PKF-HR is forecasting this pattern to continue. Supply growth in the cities (2.5 percent) is expected to exceed the increase in overall national lodging inventory (1.5 percent).
They say everything grows bigger in Texas, and this saying holds true in the current lodging market. Four of the five cities that will see the largest increase in competition during 2010 are located in Texas. On the other hand, the lingering impact of hotel closings in Cleveland during 2009 will result in an annualized decline in the net inventory of hotel rooms in 2010. San Francisco and Newark are two markets where the hotel supply is forecast to remain virtually flat.
Fortunately for hotels in the nation’s major markets, the pace of demand growth in the cities is expected to exceed the national average. On average, the demand for lodging accommodations in the cities is forecast to grow 2.3 percent in 2010 compared to the national average of 1.9 percent.
This demand growth premium will help to mitigate the impact of all the new urban and suburban supply. This is particularly true in both San Antonio and Houston, two markets expected to see the greatest increases in both supply and demand during 2010. Other cities where the local economy should boost demand are Oakland, Newark, and Hartford.
Two cities in Florida (Ft. Lauderdale and Tampa) top a list of five markets in the U.S. where demand is forecast to contract in 2010. Following a year of lodging demand generated by the change in the Presidential administration, Washington DC hotels are projected to sell 1.4 percent fewer rooms in 2010.
Occupancy/ADR/RevPAR
As forecast in the September 2009 edition of Hotel Horizons®, the national average decline in ADR reached its cyclical low point in the third quarter of 2009. However, the magnitude of the ADR decline at its turning point was lower than anticipated. As a result, PKF-HR has adjusted the level of its forecast decline in the nationwide ADR for 2010 from 3.1 percent to 1.5 percent.
As noted earlier, the nation’s largest cities should actually see their room rates grow 0.7 percent in 2010. This is contrary to historical trends that saw city ADRs grow at a CAGR of 3.1 percent from 1988 to 2008, a pace less than the national average of 3.4 percent.
West Palm Beach, Oahu, and Richmond are the nation’s markets forecast to see the greatest increases in ADR in 2010. Competitive market conditions will force properties operating in Hartford, Oakland, and Washington DC to discount the most during the year.
While 45 of the 50 markets in the Hotel Horizons® universe are forecast to benefit from an increase in demand in 2010, the growth in room supply is expected to exceed demand in 26 of these cities. New York and Fort Lauderdale properties will suffer the largest declines in occupancy, while Oakland and Newark are expected to benefit the most from favorable supply and demand trends.
In 2009, all 50 markets forecast by PKF-HR are projected to suffer an annual decline in RevPAR. However, in 2010, most market will begin to enjoy year-over-year gains in RevPAR over the course of the year. In 28 of the 50 markets, the RevPAR growth will occur as early as the first half of 2010, while another 16 will enjoy RevPAR gains during the latter part of the year. Unfortunately, market fundamentals will keep six markets from achieving RevPAR growth until 2011.
Hotels in Newark should enjoy the greatest gains in RevPAR during 2010 due mostly to a 5.3 percent boost to occupancy. On the other hand, the 7.2 percent rise in RevPAR for the Oahu market will be driven by a healthy 5.0 percent increase in ADR. Suffering the greatest decline in RevPAR in 2010 are the mid-Atlantic cities of Washington DC and Baltimore.
The overall outlook for major markets is more optimist than the nation as a whole. However, because of the diversity in forecasts, it is important for all lodging industry participants – lenders, investors, and managers alike – to gain a thorough understanding of the unique local factors that influence the performance of hotels in the cities where they have an interest.