Understand your local hotel market when making 2018 budget

Fall is budgeting season for most U.S. hotels. The ultimate end-product of the budget process is an estimated financial statement for the upcoming year that is approved by hotel ownership. However, before all the revenues and expenses are put down on paper, the budget process begins with the preparation of the marketing plan. Hotel management estimates the number of roomnights the hotel will rent (occupancy), and price they will be able to charge (average daily rate).

Previous research conducted by CBRE Hotels’ Americas Research has found that 75 percent to 80 percent of a hotel’s performance can be explained through movements in the larger market. Now more than ever, it is important to understand local market conditions, especially if your hotel is located in one of the nation’s major markets. CBRE is currently observing significant differences between national lodging market performance data and our projections for the 60 major markets for which we produce a Hotel Horizons forecast report.

According to the September 2017 editions of Hotel Horizons, U.S. hotels will once again achieve record occupancy levels in 2018. For the year, CBRE is forecasting a 0.1-percent occupancy increase along with a 2.3-percent rise in ADR. The net result is a projected 2.4-percent boost to revenue per available room.

While the overall U.S. lodging industry is achieving continued occupancy growth, it should be noted that the aggregate occupancy level for our 60 Horizons markets is forecast to decline 0.7 percent in 2018. Conversely, the remaining U.S. markets are projected to enjoy a 0.7-percent boost to their occupancy levels.

Differences between national and market level performance are also observed when looking at the ADR forecasts for 2018. The 60 Hotel Horizons markets are forecast to achieve a 2.6-percent increase in ADR for the year. This is greater than the 2.3-percent rise in ADR forecast for the nation and the 1.6 percent growth rate projected for the smaller markets outside the Horizons universe.

Supply and Demand

For 2018, CBRE is forecasting a 2-percent increase in the number of available rooms in the U.S. This exceeds the 1.8-percent long-run average annual rate of supply growth as reported by STR.

The influence of new supply is somewhat muted when reviewing the national statistics, but supply growth in excess of demand is the reason why 50 of the 60 major markets in the Hotel Horizons universe are projected to realize a decline in occupancy in 2018. The disparity between the performance of the overall national market and the major local markets is driven by the skew of development activity. Nearly 90 percent of the new hotel rooms entering the U.S. in 2018 will reside in the 60 Hotel Horizons markets.

Developers continue to show their affection for the Nashville market. In 2018, Nashville lodging supply is forecast to increase 8.1 percent. This would mark the largest annual percentage increase in supply for any Hotel Horizons market since Fort Worth, Texas, posted a 9.8-percent growth rate in 2009. Also forecast to see supply increases of 7 percent or more in 2018 are New York; Austin, Texas; Miami; and Savannah, Ga.

Least favorite among developers in 2018 are the hotel markets of West Palm Beach, Fla.; Oakland, Calif.; Tucson, Ariz.; and Albuquerque, N.M. The lodging supply in these markets is projected to grow less than 1 percent.

Fortunately for hoteliers in Nashville, New York and Miami, a lot of the new supply will be filled by new demand. These three markets are projected to enjoy demand growth in excess of 5 percent in 2018. On the other hand, hoteliers in Oakland will see a demand decline of 1 percent.

Occupancy and ADR

Despite the increase in competition, aggregate occupancy levels for the 60 Hotel Horizons markets are forecast to remain above 70 percent through 2021. In 2018, 52 of the 60 markets are projected to achieve occupancies above their long-run average.

The greatest increases in occupancy (1.3 percent) during 2018 are forecast for San Antonio and Houston. It should be noted that these two markets have seen significant supply growth since the depths of the 2009 industry recession. The greatest decline in occupancy is forecast for the Seattle market (-3.5 percent), the result of a 6.9-increase in supply that surpasses the expected 3.2-percent rise in demand.

Forty-nine of the Hotel Horizons markets are forecast to enjoy an ADR increase in excess of the projected 2.2-percent rate of inflation. Real ADR growth in the face of declining occupancy speaks to the strength of most U.S. lodging markets.

The depressed energy market along with recent increases in supply will serve to depress ADRs in Houston (-1 percent) during 2018. Strong increases in supply help to explain the slow ADR growth in Pittsburgh, New York and Miami. Enjoying relatively strong ADR gains will be the markets of Sacramento and Anaheim, Calif.; Orlando; and Salt Lake City.

Now more than ever, the “street-corner business” adage that has always been touted applies. It is very important to gain a thorough understanding of local market conditions when preparing hotel budgets for 2018.