The recovery of the U.S. lodging industry has been led by hotels located in the nation’s major coastal markets. According to the PKF Hospitality Research March 2014 edition of Hotel Horizons, the markets forecast to achieve the 12 highest occupancy levels in 2014 are all located in states that border the Atlantic or Pacific oceans. These major gateway markets have benefited from the presence of in-bound international travelers, luxury hotels that attract high-income customers, greater levels of employment, and active ports. Now, with occupancy levels above 70 percent, PKF-HR is forecasting room rates in these 12 large cities to increase by 6.6 percent, on average, in 2014.
Lagging in the recovery have been secondary markets located in the mid-section of the nation. Fortunately, lodging is a cyclical industry, and we are beginning to see the early signs of a stronger recovery for the secondary cities. The list of top 10 markets for occupancy growth in 2014 includes Kansas City, Mo.; Salt Lake City; Tucson, Ariz; Raleigh-Durham, N.C.; Memphis, Tenn.; Albuquerque, N.M.; and Richmond, Va.
Looking at historical cycles we know that occupancy growth typically is the initial indicator of recovery, followed by gains in average daily rates. This trend is proving true in 2014. The top 10 occupancy growth markets are forecast to average an occupancy increase of 2.4 percent during the year, along with a 3.9-percent change in ADR.
In general, the secondary markets located in the central regions of the country have a greater mix of moderate-priced properties compared to the coastal gateway markets. Prior research conducted by PKF-HR has found that changes in the demand for lower-priced properties are highly correlated to changes in employment. According to Moody’s Analytics, national employment levels are expected to exceed pre-recession levels by the end of 2014. Therefore, the prospects for continued growth in demand and occupancy are strong.
Supply and Demand
For most hoteliers, new competition will not be an issue in 2014. In 45 of the 50 Horizons markets, the net change in supply forecast for 2014 is less than the 2.0-percent long-run national average. Hotel construction continues to remain most active in New York City where the lodging supply is projected to increase by 7.0 percent. Other metro areas expected to see relatively strong gains in supply include Austin, Texas; Newark, N.J.; and Miami.
High economic and regulatory hurdles limit the ability of developers to construct new hotels in northern California. Therefore, it is not surprising that the lodging supplies in Sacramento, Oakland and San Francisco will remain virtually the same in 2014 compared to 2013. Hotel closings will result in net declines in Ft. Lauderdale, Fla., and Albuquerque, N.M.
Fortunately for hotel operators in Nashville, Austin and Newark, PKF-HR is forecasting sufficient growth in demand to outpace the strong projections of new supply in their respective cities.
Occupancy, ADR, RevPAR
The combination of a 3.3-percent gain in demand with a 0.3-percent increase in supply will result in a nation-leading forecast boost to occupancy of 3.0 percent in Kansas City during 2014. Conversely, while occupancy in Miami, Oahu, New York and Long Island, N.Y., is forecast to decline in 2014, occupancy levels will remain above 70 percent.
The best news for hotel managers in 2014 is the projections of strong ADR growth. All but two (Philadelphia and Washington, D.C.) of the 50 Horizons markets are forecast to achieve ADR increases greater than Moody’s Analytics' 1.8-percent forecast for inflation in 2014. ADR growth above inflation typically leads to significant gains in profits.
High occupancy levels and limited new competition should allow hotel operators in San Francisco, Oakland, Portland, Ore., and Oahu to push room rates aggressively in 2014. Hotels in these markets are expected to enjoy ADR growth in excess of 7.5 percent.
In all but one market (Tucson), ADR growth is the primary factor driving RevPAR in 2014. On average, ADR will be responsible for 86.6 percent of the increase in rooms revenue for hotels in the nation’s major markets.