The 4,374 square-mile region comprising four northeastern Pennsylvania counties—Bradford, Lycoming, Susquehanna and Tioga—experienced a hotel industry RevPAR growth of 37 percent from 2007 to 2010, and grew another 22.2 percent through August of 2011.

That's not a misprint; rather, this remarkable growth is largely attributable to the exploitation of an old resource through the birth of a new industry: natural gas extraction from the Marcellus Shale.

The Marcellus Shale is a massive geological formation underlying much of northeastern Appalachia, including northern, central and western Pennsylvania. In August 2011, the U.S. Geologic Survey estimated that the Marcellus formation contains 84 trillion cubic feet (Tcf) of natural gas, revising upward its 2002 estimate of just two Tcf, propelling it to among the largest known shale natural gas "plays" in the world.

While Marcellus drilling has been introduced to much of Pennsylvania, some areas have received particularly large amounts of activity. Exhibit 1 illustrates the concentration of drilling activity experienced by the studied four-county region in Pennsylvania.

Exhibit 1



Prior to the introduction of Marcellus drilling, the region's manufacturing and agriculturally-focused economy was largely mature, if not in slow decline, with a stable to slightly decreasing population. This historical stability represents a helpful "control" prism through which recent growth can be reliably attributed to the introduction of external stimuli, such as the Marcellus industry.

Since the start of large-scale drilling operations in 2008, the presence of the Marcellus formation has become centrally important to the region's lodging market because of the substantial demand for transient lodging that shale natural gas industry activities generate. This demand materializes most prevalently during the initial pre-drilling and drilling phases, and diminishes during the subsequent production phase.

The Regional Hotel Market

The preponderance of the region's inventory of 31 hotels representing 2,192 guestrooms is concentrated in larger towns and cities including Williamsport, Wellsboro, Mansfield and Towanda. Exhibit 2 illustrates the Northeast regional lodging market.

Exhibit 2



Historically, the hotel market in this region of Pennsylvania experienced occupancies in the mid-50 percent range. Exhibit 3 summarizes levels of supply, accommodated demand (expressed in room-nights) and resultant occupancy for the hotel industry in the defined northeast Pennsylvania region over the 2006 to August 2011 period.



As the table indicates, supply grew at a compound annual rate of 2.2 percent over the five-year period 2006 to 2010, with the majority of supply growth materializing in 2010. Demand growth, at an average annual rate of 9.6 percent, far outpaced supply and also grew most robustly in 2010. These trends in supply and demand led to modest but consistent occupancy increases from 55.6 percent in 2006 to 59.9 percent in 2009 followed by an occupancy "boom" of 13.7 points in 2010.

This historical performance is especially noteworthy in the context of the Great Recession's impact upon hotel industry demand nationally. Year-to-date through August of 2011, demand growth has continued to outpace supply, leading to a 3.5-point increase in market occupancy to 78.0 percent.

Drilling and Demand

The correlation between drilling and lodging demand growth in these early stages of Marcellus development is intriguing. Exhibit 4 summarizes the comparison between Marcellus wells drilled and accommodated demand growth, as measured by room-nights, in the region since 2008.



As the table indicates, demand per well drilled has mostly materialized in a narrow range just over 200 room-nights, with an exception in 2009 when the impact of the nation's recession likely retarded overall demand growth in the region. Exhibits 5 and 6 reiterate this drilling-to-demand relationship.





This influx of demand from the burgeoning Marcellus industry has also buoyed hotel industry performance through room rate growth. Remarkably, the region's ADR grew uninterrupted throughout the recessionary period.



The Future

Having examined the recent past to establish the Marcellus' relevance for the region's hotel industry, the next question arises: What will the impact of the Marcellus look like in the future? The pace of future drilling activity is inherently difficult to predict due to a variety of factors such as events in the political and legislative arenas and external macroeconomic trends.

However, the Marcellus Shale Education and Training Center (MSETC), a collaboration of the Pennsylvania College of Technology and the Penn State Cooperative Extension, has published mid-term projections of Marcellus drilling for an area of Pennsylvania overlaying the northeast region. Exhibit 8 illustrates METC's projections of Marcellus wells drilled for its "Northeast" region through 2014.



The MSETC projections indicate that heavy drilling activity in excess of 1,000 wells per year will continue in the region through at least 2014; however, the current rapid growth trend is expected to plateau in 2012. Given the demonstrated relationship historically between drilling activity and lodging demand in the region, it appears that the majority of incremental drilling impacts to demand in this region have been felt. That said, we note that prior projections by MSETC have underestimated drilling growth and as we move forward, the 2012 outlook deserves close monitoring.

Conclusion

The surveyed northeast region of Pennsylvania is benefiting economically from the rapid growth of the natural gas industry's exploitation of the Marcellus Shale. Demand for lodging, driven by transient workforce influxes, is driving strong growth in occupancies and ADRs in a historically lackluster hotel market. The regional hotel industry's robust performance is attracting interest in further hotel development which, barring rash over-construction, should be healthily absorbed.

The relatively new technological advancements which have unlocked shale gas reserves in this region of Pennsylvania are also being applied in other regions within the Marcellus and shale formations elsewhere in the region and U.S. Indeed, hotel developers and investors may find value in drilling for opportunities.

Tony Biddle, Senior Consultant, works in the Philadelphia office of PKF Consulting USA www.pkfc.com