Lodging industry rebound seen continuing

Real Estate Weekly, May 17, 1995

For the first time, Coopers & Lybrand extended the 12-quarter industry forecast to 10 years, utilizing trend- and cycle-scenario analysis that respectively account for real GDP trend growth and the possibility for recession.

"Forecasts through 2004 indicate a lodging industry that is becoming less vulnerable to recession," states Mark Woodworth, Industry Chairman. "Both trend and cycle scenarios suggest an occupancy rate that will not fall below 66 percent during this period and firmly positions the industry for sustained performance."

Assuming that no recession occurs during the period between 1995 and 2004, room-demand growth will average 2.9 percent, nearly identical to the historical average of 3 percent between 1974 and 1994.

Overall, this scenario supports the prediction that industry profits, which reappeared in 1993 after an 11-year absence, will continue to increase substantially through the later half of the decade.

Cycle Scenario: Recession in 1998, 2003

In this scenario, U.S. economic growth slows to 1.2 percent by 1997, an interest-rate induced recession is produced in 1998 followed by a rebound until 2002 and another relapse in 2003. Even though demand and supply growth will be slower than in the trend scenario, occupancy rates will remain above 66 percent during the 1998 recession and above 68 percent in 2003. This is in sharp contrast to the last recession, which saw occupancy rates drop to 60.8 percent.

The cycle scenario displays an industry less susceptible to recession primarily due to an increasing healthy spread between demand and supply growth.

According to the report, favorable demand growth to 1997 will be a result of moderate economic expansion and current positive indicators, which include strong consumer confidence and increases in air-line seat occupancies.

These factors will contribute to a rise in hotel occupancy from an average of 66.7 percent in 1995 to 68.7 percent by the end of 1997.

Overall, analysis results project supply growth to remain modest at less than 1.5 percent per year over the next three years. The criteria for building prosperity like that experienced in the 1980s are absent due to the elimination of favorable tax provisions related to real estate; the persistent wedge between replacement and acquisition costs for large, full-service properties; and continuing cost and competitive pressures.

"Although another building boom is not expected, the axiom that excess profits breed ruinous competition warrants consideration," cautions Woodworth. "At least three factors may lead to faster supply growth: aging hotel inventory, which invites new construction; anticipated positive profit performance, which attracts investment capital to fund new construction, and a relaxation of underwriting parameters, which could make debt financing more available and affordable."