Summer Forecast

As the U.S. hotel industry continues to post good results, STR is optimistic about the outlook for the summer of 2012.
A look at what has transpired already this year provides a solid background for the optimism. During the first quarter of this year hoteliers across the nation sold a record 245 million room nights. This is the result of continued strength in the transient and group segment. We hear anecdotally that leisure travelers, especially on the high end, are spending and traveling while leaving the thrifty times of 2009 behind. At the same time, corporate demand for small and large meetings continues to fuel the midweek U.S. occupancy rate—which for the 12 months ending March stood at 63 percent on Tuesdays and 64 percent on Wednesdays.

These strong demand trends are coupled with the continued lack of new supply. The good news for existing hotels is that we do not expect new hotels to meaningfully impact nationwide occupancies until at least 2014. Of course, your situation may vary, as there are markets with robust pipelines—including New York City, where we count 50 projects in the development pipeline. But NYC is generally always an exception because of its status as a prominent gateway city. In general, the lack of lending across all segments will have an impact on the supply pipeline for some time. Limited-service hotels might be an exception as those hotels are less expensive to build and operate, and we see some development activity in the upper-midscale and midscale segments.

All of this paints a fairly bright picture for June, July, and August. For the summer we expect that the confluence of the demand/supply imbalance in favor of demand will increase occupancy by 1.8 percent to 69 percent. The underlying statistics to this occupancy increase are the low supply growth rate of 0.4 percent and the demand increase of 2.1 percent. At the same time, we expect room revenues to increase 6.1 percent over revenues in summer 2011. This will result in ADR growth of 3.9 percent to around $106 and RevPAR growth of 5.7 percent to about $74.

These summer results will have a positive impact on rate growth for the fall. We expect transient room rates to continue to increase around 4 percent to 5 percent, however we are still concerned that group-rate growth pace will still lag significantly and therefore depress overall ADR growth on the upper end of the market.

For the remainder of the year, we expect the trends that have shaped the first quarter to continue and to make 2012 another year of record room demand. Well over 1 billion room nights will be sold as room demand is forecast to grow 2 percent. With supply growth slowing to 0.4 percent for the year, we forecast occupancy to grow 1.5 percent. As the industry is expected to continue to report occupancies well over 60 percent, pricing power is firmly in the hands of the operators and we forecast ADR growth around 4 percent, which then fuels the projected 5.5 percent RevPAR increase.

There are, of course, a few wild cards that could unhinge this scenario, including:

- The impact of the European debt crisis on tourism spend from European travelers to the U.S. is yet to be felt.
- The volatility of gas prices, while not expected to have a major impact, could impact consumer confidence.
- And U.S. gross domestic product growth, while steady, may not be strong enough to continue to fuel corporate spending.

But the likelihood of all these potential negative impacts to converge in 2012 is probably quite low. We expect that the traveling public, on the road for both corporate and leisure reasons, will allow hoteliers to improve their business fundamentals and profits for the foreseeable future.

Jan D. Freitag is senior vice president at STR.

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