Demand, pricing power to aid U.S. lodging industry

The U.S. lodging industry ended 2014 on a strong note, with industry occupancy reaching levels not seen since 1984. During the year, U.S. hotels surprised with solid demand growth, despite a stuttering start to economic growth. Group demand was the leading cause for peak occupancy levels in 2014. While transient demand increased by 1.7 percent, group demand increased at twice the pace, at 3.4 percent.

Building on this strong level of occupancy, PwC’s updated lodging outlook anticipates US hotels to gain substantial pricing power in 2015, with over 80 percent of the expected 7.4 percent increase in revenue per available room (RevPAR) being driven by average daily rate (ADR).

The recovery in ADR coming out of the economic downturn has so far been slower than in the previous cycle. While above the long-term average, almost seven years later, real ADR has still not recovered to peak 2007 levels. During the previous cycle, real ADR recovered past the 2000 peak level in six years. PwC’s latest lodging outlook expects real ADR levels in 2015 to finally recover past the 2007 peak, due to a combination of factors, including: 

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Continuing positive demand-supply balance
Demand growth has exceeded the increase in available hotel rooms in every year since 2010 and is expected to do so again in 2015. This will represent the longest period (six years) of sustained demand-over-supply growth since the period from 1976 to 1979. While the spread between demand and supply growth decreased in 2012 and 2013, primarily due to lower demand growth caused by external factors (government shutdown, sequestration, etc.), 2014 represented a year of robust demand recovery (4.5 percent). In 2015, while demand growth (at 2.6 percent) is expected to slow, it is still anticipated to exceed the increase in supply, which, at 1.5 percent, is expected to remain below the long-term average of 1.9 percent.

Increasing use of rate management tools
The trajectory of ADR will perhaps be the most closely watched performance measure during 2015. Pricing gains, achieved through a combination of shifts in business mix, choice of distribution channels, and utilization of sophisticated revenue management strategies during increasingly peak periods, are expected to enable hotel operators to make valuable headway in expanding margins. 

Current conditions in the lodging sector are favorable to tip the balance of pricing power toward hotel operators, with below-average supply growth, favorable macroeconomic conditions, and strong business and consumer sentiment. While conditions in specific markets will vary, hotel operators in many markets will find ample opportunity to drive meaningful ADR growth, yielding heightened flow-through to the bottom line.

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