Gaining Traction

The continued demand and rate increases in the U.S. lodging industry are a good sign for a continued recovery, and we expect the next 24 months to continue to show increases in revenue per available room.

While all chain-scale segments have reported improved data over the last 12 months, the performance of the midscale hotels is particularly noteworthy. During the year ending in February, the performances of the upper midscale and midscale segments were driven by the ongoing supply and demand imbalance, with few new rooms being built and many more rooms being sold. The ongoing inability to secure funding for new hotels translates into one of the lowest numbers of rooms under construction on record.

There are approximately 83,100 upper midscale rooms and approximately 23,900 midscale rooms in the active development pipeline, with 16,600 rooms and 3,200 rooms categorized as under construction, respectively. These room counts are somewhat higher than they were last year but still well below the peak during 2007.

Demand for hotels in the upper midscale and midscale segments has increased from a combined 252 million rooms in 2007 to today’s 283 million rooms—a 12.3 percent increase. This increase is a clear indicator of the continued strength of both business and leisure demand. As corporate profits continue to increase, corporations continue to send their staffs on the road. In addition, it stands to reason that the American public, when spending its own dollar, is now a bit more optimistic and therefore more inclined to travel.

The third variable of the positive performance equation, besides supply and demand, is always the growth of average daily rate. As demand increases and the absolute occupancy for upper midscale hotels (61.6 percent) and midscale hotels (53.7 percent) grows as well, ADR increases are expected across the board.

Through the first two months of 2012 annualized ADRs for hotels in both chain-scale segments are nearly back to 2007 levels. Upper midscale hotels have $2.74 to make up to regain 2007 levels, while midscale hotels are actually $0.07 above the December 2007 ADR. We expect further ADR growth in the coming years too, as the higher levels of room demand give hoteliers the confidence to raise rates and capitalize on the improved macro economic situation.

Despite the lack of financing there are a few noteworthy midscale and upper midscale developments underway in select markets:

In the New York City MSA, 2,500 upper midscale rooms (19 projects) and 409 midscale rooms (three projects) are under construction. This reinforces the point of view that New York City always will be isolated from the general financing environment because of its special gateway status and unique tourism and business demand drivers.

In Nashville, spurred by the new Music City Center, a 1.2-million-square-foot convention center, 588 upper midscale rooms are currently being built in three projects.

Seattle is also showing three hotels with 497 rooms currently being built.

Interestingly, the largest grouping of projects in the under construction pipeline are located in non-MSA areas, with some 45 upper midscale hotels and 3,700 rooms and 15 midscale hotels with 1,000 rooms.

Upper midscale and midscale hotel development often is spurred by regional developers working with regional banks to benefit the location in which both the developer and bank do business. Given the trends in our data, it is probably fair to assume that we will see an increase in development in both chain scales to take advantage from the continued performance improvements.

Jan Freitag is senior vice president at STR.

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