Major markets lead recovery

In the March 2010 edition of Hotel Horizons, PKF Hospitality Research is forecasting another year of competitive market conditions for U.S. hotels. In 2010, PKF-HR is projecting a RevPAR decline of 1.1 percent, the net result of a 0.3-percent increase in occupancy, but a 1.4-percent fall off in ADR. On the surface, these nationwide performance measurements paint a sad picture.

Fortunately for hoteliers that own or operate properties in the nation’s major metropolitan areas, the story is a bit brighter. Based on our firm’s unique econometric models for 50 of the largest U.S. markets, occupancy levels are forecast to rise 0.6 percent, a level similar to the overall national average.

However, unlike the rest of the nation, a healthy 3.7-percent increase in the demand for hotels in these major markets will allow for extra pricing power. In aggregate, the ADR for the 50 markets is forecast to increase 0.8 percent in 2010. While this increase in ADR still lags behind the pace of inflation and long-term average growth rate, it does contribute to a 1.3 percent increase in RevPAR, a fortunate trend relative to the rural, resort and tertiary markets.

While performance is forecast to be better in the major markets, we know that competitive conditions will vary city by city. In this column, we identify the markets where 2010 hotel performance is forecast to differ most dramatically from the national average.

Supply/demand
While the pace of hotel construction activity is certainly diminishing, some major markets will still see a combination of new hotel openings in 2010, as well as lingering competition from properties that opened in 2009. Nationwide, PKF-HR is forecasting a 1.2-percent net increase in lodging supply in 2010. Within the major markets, the rise in supply is projected to be a healthier 3.1 percent. PKF-HR believes the greater increase in the major market inventory can be partially attributed to the extended development time required for the larger and more extensive facilities built in the nation’s urban areas. In addition, the sprawling suburbs of the major metro areas have low barriers to entry and are desirable targets for the developers of new limited and select-service properties.

Texas cities continue to dominate the market areas that will experience the greatest increases in supply. Four of the five cities that will see the largest increase in competition during 2010 are located in the Lone Star State. 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, Oakland and Newark are three markets where the hotel supply is forecast to remain virtually flat.

As noted before, the pace of demand growth in the major markets is expected to exceed the national average. This demand growth premium offsets the impact of all the new urban and suburban supply.

The cities of Newark, Kansas City and San Antonio are forecast to enjoy the greatest increases in demand in 2010. Conversely, PKF-HR is forecasting fewer rooms will be occupied in 2010 in Denver and Baltimore.

Occupancy/ADR/RevPAR
More than half (29) of the 50 markets in the Hotel Horizons universe are forecast to achieve an increase in occupancy in 2010. When looking at the cities that are forecast to achieve the greatest increases in occupancy, it is not surprising to find Newark and Oakland. These two cities also appear on the list of markets that will enjoy the greatest gains in demand.

On the other hand, cities like San Antonio and New York are forecast to suffer some of the greatest declines in occupancy during 2010. Despite demand growth in excess of 6 percent, hotels in these two cities will have to compete with supply gains in excess of 9 percent.

Salt Lake City and Oahu are two markets forecast to see the greatest increase in ADR in 2010. Both markets are projected to experience growth in demand in excess of the national average.

Competitive market conditions in Phoenix and Austin, Texas, will force hotels in these markets to discount once again in 2010. In Washington, D.C., hotels will not enjoy the enhanced demand generated by the change in the Presidential administration during 2009. Accordingly, room rates are forecast to decline in 2010.

Strong gains in occupancy will allow hotels in Newark, Boston and Anaheim to enjoy the greatest gains in RevPAR in 2010. On the other hand, it is the strong ADR growth that will drive the significant RevPAR gains projected for properties in Oahu and Salt Lake City.

The overall outlook for major markets is more optimistic 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.

R. Mark Woodworth is President of PKF Hospitality Research (www.pkfc.com). He is located in the firm’s Atlanta office. To learn more about the Hotel Horizons® forecast reports for 50 markets in the United States, please visit www.HotelHorizons.com, or call (866) 842-8754.