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U.S. Hotels Poised for Growth in 2014

U.S. Hotels Poised for Growth in 2014

ATLANTA, Ga.—After a slight deceleration in growth during the last half of 2013, U.S. hotels should see strong gains in revenues and profits in 2014 and 2015 according to PKF Hospitality Research (PKF-HR). According to the recently released December 2013 edition of Hotel Horizons, national revenue per available room (RevPAR) is projected to increase by 6.6 percent in 2014, followed by another 7.5 percent boost in 2015. Concurrently, hotel profits should enjoy growth of 12.8 percent and 14.5 percent respectively over the next two years.

“As anticipated, RevPAR growth slowed down a bit in 2013 compared to the previous three years,” said R. Mark Woodworth, president of PKF-HR. “Entering the year, we knew fears of falling off the fiscal cliff would create uncertainty in the minds of potential travelers. As the year progressed, the sequester and government shutdown caused additional angst. However, despite the challenging economic environment, we observed above average growth in lodging demand, average daily rates (ADR), RevPAR, and profits.”

PKF-HR estimates that by year-end 2013, lodging demand will grow by 2.1 percent. This is greater than the projected 0.8 percent increase in supply, thus resulting in a 1.3 percent gain in occupancy. The 62.1 percent occupancy level estimated for the year surpasses the long-run average of 61.9 percent as reported by Smith Travel Research (STR).

“Our firm’s forecast for nominal ADR growth in 2013 is 3.9 percent. Given the fact that occupancy levels have finally eclipsed the long-run average, some hoteliers were expecting even greater rate growth. Clearly this is the one measure that was impacted most by the economic uncertainty that characterized 2013,” said Woodworth. “Industry participants need to temper their disappointment, though. As we have noted in the past, hotels have been achieving highly desirable, real ADR growth during this low inflationary environment. We also should note that evidence of greater future demand from meeting planners will lend tensile strength to revenue manager’s enhanced pricing power in 2014.”

Economic Improvement
While the enjoyment of U.S. hotel owners and operators may have been restrained in 2013, they should be jubilant the next two years. PKF-HR’s lodging forecasts are driven by economic projections provided by Moody’s Analytics. According to Moody’s, 2014 is showing all the signs of being a “breakout year.”

“We are very encouraged by Moody’s outlook for the national economy in 2014,” said John B. Corgel, PhD., the Robert C. Baker professor of real estate at the Cornell University School of Hotel Administration and senior advisor to PKF-HR. “As lodging forecasters, it is our role to interpret the economic variables provided by Moody’s and produce projections of hotel performance. Moody’s has identified certain economic factors that we believe will have a very positive impact on the growth of lodging demand and room rates over the next few years.”

The following statements highlight Moody’s current outlook for the economy in 2014 and beyond:

  • Accelerating job growth should allow the U.S. to reach full employment in three years.
  • Debt burdens have fallen, businesses are flush with cash, and profit margins are strong.
  • Confidence has been the missing ingredient, but signs point to stronger investor and consumer sentiment.

“Of course, there are still some potential obstacles that we will be monitoring. The continuing brinksmanship between Congress and the executive branch perpetuates economic uncertainty. Also, it will be interesting to see how the Federal Reserve acts as the economy improves, and they unwind the monetary stimulus enacted during the depths of the recession,” Corgel observed.

Based on Moody’s projections for GDP, income and employment growth in 2014, PKF-HR is forecasting lodging demand to grow by 3 percent along with a 1.8 percent rise in supply. The net result is a 1.8 percent gain in occupancy, accompanied by a 4.8 percent increase in ADR.

Location Outlook
Given the strong outlook for U.S. lodging performance, investment and development interest is high. “The relatively strong recovery of luxury, upper-upscale and upscale hotels located within the nation’s major markets has been well documented. Therefore, it has not been surprising that these property types are attracting the greatest interest. Now we are seeing our clients starting to focus on what areas to invest and/or build their upper-priced hotels within these strong markets,” noted Woodworth.

Since 2009, PKF-HR has been forecasting the performance of six location categories. The location classifications as defined by STR are airport, interstate, resort, small town/metro, suburban, and urban. Just as has been observed within the chain-scales, the recovery patterns among the different location categories have varied since 2009. As of year-end 2013, PKF-HR estimates the only location groupings to have returned to their pre-recession peak levels of occupancy will be airport and urban hotels.

“Urban hotels were the first location category to recover from the recession. While this limits their potential for additional occupancy gains, they are at a point in their respective business cycle where pricing power will dominate revenue growth. Conversely, airport hotels are just reaching their previous peak, so they are expected to continue to benefit from strong gains in both occupancy and ADR in 2014,” said Woodworth.

Among the location categories, hotels located in airport, resort, and suburban areas are forecast to achieve the greatest gains in RevPAR in 2014. Lagging in RevPAR growth will be properties operating along the nation’s interstate highways and in small towns. “This is a natural progression – strong performance in the central business district leads to compression in the rest of the metro area,” Woodworth concluded.

Photo credit: Data Chart via Bigstock

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