Lodging cycle encouraging, but supply concerns loom

The lodging industry began 2014 in a much better place than just 12 months ago. In the last year, U.S. hotels entered a new stage of the cycle—starting off faced with short-term uncertainties associated with fiscal policy challenges and slowing foreign economic growth, and ending the year part of a stronger and more clear economic environment, marked by rising consumer and business confidence. Despite several macroeconomic headwinds, including uncertainty around the debt ceiling and a federal government shutdown, U.S. hotels finished 2013 on a strong note, with a revenue per available room gain of 5.4 percent (Table 1). PwC’s updated lodging outlook incorporates recent hotel performance—strong demand growth in the fourth quarter, albeit with more modest gains in average daily rate—and a macroeconomic context that is clearer.

Continued recovery in lodging demand and gathering economic momentum supports PwC’s expectations for improving hotel performance in 2014. The lodging cycle is at an encouraging point in the recovery, with above average occupancy levels and demand growth that continues to outpace hotel openings. Stronger growth in ADR is expected as revenue management tactics gain traction, resulting in an estimated 6.0-percent increase in RevPAR this year. As a milestone in the current recovery, by the fourth quarter of 2014, real, seasonally adjusted RevPAR is expected to recover to the peak reached in the fourth quarter of 2007 at the onset of the economic recession (Figure 1). PwC’s current lodging outlook is driven by two key, but opposing, underlying assumptions:

* Clear and positive U.S. economic outlook: Underlying the effects of the fiscal drag, the economy showed greater than anticipated momentum last year. Macroeconomic Advisers LLC, the firm that provides the underlying economic drivers to PwC’s lodging outlook, now anticipates that real gross domestic product (GDP) grew above trend in 2013 (2.6 percent), and expects growth to improve to 3.1 percent in 2014. Additionally, key macroeconomic indicators point to favorable leisure and business travel trends. In the leisure segment, travel growth is expected to be supported by recent gains in household wealth (up $9.7 trillion, or 13.7 percent, in 2013), reduced household deleveraging, and waning effects of the adjustment to higher income taxes. In the business segment, the lingering uncertainty that restrained business investment spending is ebbing and confidence is building. Downside risks have eased somewhat, with the signing of a two-year federal budget, better prospects for eurozone recovery, less concern of a hard-landing in China, and lower risk of a wider conflict in the Middle East.

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* Increasing supply of new hotels: Hotel construction activity is rebounding, albeit from a low base. After three years of unusually low supply growth, U.S. lodging supply is expected to increase by 1.0 percent in 2014, the highest since 2010. While the short-term risks remain tepid, with fourth quarter room construction starts up significantly (44.1 percent ahead of prior year), the pipeline for 2015 hotel openings is expanding substantially (Figure 2).

With hotels in higher-priced chain scales (luxury, upper upscale, and upscale) operating at occupancy levels at or above prior peak levels, pricing is expected to be the primary driver of RevPAR growth for many hotels. In 2014, PwC expects over 75 percent of the RevPAR growth to be driven by ADR, the highest since the lodging recovery began in 2009 (Figure 3). In many markets, hotel operators will find ample opportunities to drive room rates, and drive better flow-through to the bottom line. While hotel operators focus on their revenue management strategies, they will also benefit from keeping a watchful eye on the supply pipeline in their respective markets. 

➔ “U.S. hotels finished 2013 on a strong note, with a revenue per available room gain of 5.4 percent.”

Table 1: PwC U.S. lodging outlook, percentage change from prior year

Figure 1: Real RevPAR

Figure 2: Hotel room construction starts

Figure 3: Contribution of ADR to RevPAR growth

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