Mixed bag predicted for nationwide hotel industry

Real Estate Weekly, Oct 8, 1997

"Macro-economic factors certainly influence global and national travel patterns, however, the strength of the overall U.S. economy, and specifically the U.S. hospitality industry, does not necessarily reflect the performance of individual markets," says Patrick Quek, president and CEO of PKF Consulting. "As an international firm with local offices, we monitor the industry not just on a global basis, but market-by-market, as well. These days, you really need to evaluate the local market conditions in order to get the real picture of what's happening in the hotel industry."

Each year, PKF Consulting projects the performance of hotels located in major U.S. cities. The results of the 1997-1998 projection were released at a press briefing held last week at the Cornell Club of New York as part of PKF Consulting's annual "State of the Hotel Industry" report.

Like Politics, All Hotels Are Local

"As most hotel managers will tell you, local economics, road repairs, weather, and competition have a much greater effect on their hotel's performance than some merger between two hotel companies enacted on Wall Street," says John A. Fox, senior vice president of PKF Consulting in New York. "You can tell a General Manager that the national occupancy level is going to increase, but that will mean nothing to him if four hotels are being built near his property and are going to drive his occupancy down next year."

The reason for the emphasis on local market conditions is the degree of variance from national performance patterns that is occurring in hotel markets across the country. "We like to play with the big numbers and look at the overall health of the industry, but these statistics are just a composite of individual market performance data throughout the nation," says Fox. "For instance, we are projecting a 1.1 percent increase in the occupancy level for major U.S. cities for year-end 1997 to the highest level in 17 years. However, over half of the cities we survey are projected to achieve an occupancy level equal to or less than the occupancy they achieved in 1996."

This pattern of diverse market performance is expected to continue into 1998. PKF Consulting projects the occupancy for the cities that it surveys to remain at 73.9 percent for both 1997 and 1998. However, of the 42 cities included in PKF Consulting's survey, 11 are projected to improve their occupancies in 1998, while 18 should experience a decline, with the remaining 13 staying flat.

While Occupancies Vary, Rate Growth Is Consistent

Unlike the different growth patterns of occupancy seen across the nation, almost all markets are experiencing strong growth in the average rate paid for a hotel room. Starting in 1996, U.S. hotels have been able to raise the rates charged for their rooms at a pace twice the rate of inflation. This strong growth has continued in 1997, as rates are expected to increase by 7.2 percent over 1996. The average room rate is projected to grow another 5.8 percent in 1998.

"While increased hotel development has caused declining occupancies for several cities, the increased competition has yet to show a dampening affect on the prices charged by hotel managers," says Fox. "Only two cities in the U.S. will not be able to raise their room rates in excess of inflation in 1998."

The increased use of revenue and yield management systems by hotels has helped them to maximize the prices they charge for their rooms. A recent sales and marketing survey by PKF Consulting shows that nearly 80 percent of the hotels in the U.S. have some form of automated yield management system in piece.

"Even though new hotels are being built in several markets, it is still difficult for travelers to book a room during the peak business days of the week, or during the heavy vacation and convention seasons," says Fox. "Yield management systems allow hotels to measure the demand for hotels and maximize the rates they charge when the rooms are wanted the most. Unless people are flexible with their travel schedules, it will still be difficult to find a discounted rate in most markets."

High Rates Equal High Profits

A by-product of the strong growth in hotel room rates is the direct beneficial effect it has on hotel profitability. With occupancies in the 70's and average room rates growing in excess of inflation, hotel operating profits continue to grow at a double digit pace. The average operating profit, measured on a per available room basis, for U.S. hotels is projected to grow from $9,804 in 1996, to $11,323 in 1997, and to $12,344 in 1998. Operating profits come after deductions for management fees, property taxes, and insurance, but before payments for rent, debt service, and income taxes, as well as noncash expenses such as depreciation and amortization.

"By the time a hotel reaches an occupancy of 70 percent or greater, it has reached a point of operating at efficient economies of scale," says Fox. "Hotel revenues are growing at 1.6 times the growth of expenses. This has resulted in the highest operating profit margins we've seen in over 30 years."