Higher demand, RevPAR contribute to heady NOI

There is much debate as to whether new lodging supply generates new demand for hotel rooms. One side will argue that a new hotel has the ability to accommodate unsatisfied demand, or induce new travelers to a market because a different type of facility and experience is now being offered. However, others will say that the unaccommodated demand is not truly “new” demand, and induced demand is simply a redistribution of existing room nights.

According to the December 2013 editions of Hotel Horizons, PKF Hospitality Research (PKF-HR) is forecasting the cities of New York, Nashville, Tenn., and Austin, Texas, to experience the greatest percentage increases in the inventory of hotel rooms during 2014. Concurrently, PKF-HR is also projecting the greatest increases in lodging demand to occur in these same three markets. Regardless of which side of the argument you agree with, the hotel owners and operators in New York, Nashville and Austin are thankful that their occupancy levels will not suffer due to the surge in new competition.

PKF-HR is forecasting a fifth consecutive year of occupancy growth for the U.S. lodging industry in 2014. The growth in occupancy is the result of a projected 3-percent gain in demand, along with a 1.2-percent rise in supply. It should be noted that the previous longest consecutive streak of annual gains in occupancy was four years (1992-1995 and 2003-2006).

Among the 50 major market areas for which PKF-HR prepares a Hotel Horizons forecast, all but eight are projected to enjoy demand increases that surpass the supply change. Leading in occupancy growth are Albuquerque, N.M., Tucson, Ariz., and Kansas City, Mo. As noted previously, we are at a stage in the lodging cycle when secondary and tertiary markets are starting to enjoy the strong gains in occupancy that heretofore have mostly been seen in the primary gateway markets.

It is notable that the three markets expected to suffer the greatest occupancy declines in 2014 are all located in the New York metropolitan area. For the Newark, N.J., and Long Island, N.Y., hotel markets, the drop in occupancy can be attributed to unfavorable prior-year comparisons created by the positive impact of Hurricane Sandy in 2013. For hotels in New York City, the nation-leading 8-percent growth in supply will surpass the very strong 6.4-percent increase in demand.

For 2014, PKF-HR is forecasting a 4.8-percent increase in average daily rate for the overall U.S. lodging market. Given the positive outlook for occupancy and demand, some hoteliers are disappointed with the pace of ADR growth. However, the 4.8-percent projected increase in ADR growth for 2014 exceeds Moody’s Analytics’ inflation forecast of just 1.8 percent for the year. While somewhat sluggish on a nominal basis, real ADR growth has been significant the past few years.

Among the 50 cities in the Horizons universe, Washington, D.C., is the only market forecast to experience a decline in ADR from 2013 to 2014. Reductions in the federal lodging per diem, along with the sequester, have had a negative impact on the D.C. lodging market.

Previous research has found that revenue per available room gains driven mostly by growth in ADR lead to greater increases in supply. In 2014, it is the combination of a 1.8-percent gain in occupancy along with a 4.8-percent increase in ADR that will result in a very healthy 6.6-percent growth rate for RevPAR. With 73 percent of RevPAR growth being driven by ADR, PKF-HR is forecasting a 12.8-percent increase in net operating income for the average hotel in the U.S. during 2014.

The benefit of profitable RevPAR growth will be enjoyed in most markets. ADR will be the main driver of RevPAR gains in 45 of the 50 Horizons cities.