The lack of meaningful increases in hotel supply, an economy that supports growth in lodging demand and market leverage that allows for real room rate growth leads to PKF-HR forecasts of healthy increases in both revenues and profits in 2013 and 2014.

In the recently released September 2013 edition of Hotel Horizons®, PKF Hospitality Research, LLC (PKF-HR) affirms its forecast of strong fundamental performance for the US lodging industry.

"It is very rare for us to say we have no concerns about the near-term outlook for the U.S. lodging industry, but that is what we see from our econometric models, as well as discussions with our clients," said R. Mark Woodworth, president of PKF-HR. "If you look at the factors that historically have derailed the good times for hotel profit growth, very few, if any, exist today."

According to the September 2013 Hotel Horizons® report, PKF-HR is forecasting U.S. hotels to enjoy a 5.9 percent increase in revenue per available room (RevPAR) in 2013, followed by RevPAR gains of 7.2 percent in 2014 and 8.1 percent in 2015. All of these projections are well above the long-run average annual RevPAR increase of 2.9 percent as reported by Smith Travel Research (STR).

ADR Should Not Be Disappointing

PKF-HR's 2013 forecast of RevPAR growth is the result of a 1.6 percent increase in occupancy and a 4.2 percent rise in average daily rates (ADR). In 2014, the prospects for growth accelerate for both occupancy (+1.9 percent) and ADR (+5.2 percent).

During their analysis of changes in ADR, PKF-HR identified factors that had a muting effect on the level of price increases.

• Group demand has been slow to recover, thus mitigating the leverage of hotel sales managers when negotiating with meeting planners and corporate accounts.
• Occupancy levels among lower priced hotels today remain suppressed relative to what had been achieved in the mid-1990s, the point in time at which upscale and upper-upscale supply expanded dramatically. This lagged recovery, and the ensuing lack of pricing power that has resulted, is serving to undermine the ability of upper priced hotel managers to increase room rates.
• Anecdotally, attractive rate gains realized by branded, upper priced hotel managers may be motivating consumers to use OTA websites. During the three year period 2010 to 2012, according to STR, upper priced room rates increased a cumulative 7.5 percent; the comparable for lower priced hotels was 3.2 percent.

"Given the strength of the fundamental measures of industry performance and underlying economics, many hoteliers have been disappointed with the pace of ADR growth during the recovery," Woodworth observed. "While we understand the reasons for their concern, further investigation reveals that their worries may be overstated. Measured in real terms, ADR has been growing roughly two percentage points in excess of the pace of inflation in recent years."

"Looking at real, as opposed to nominal, changes in ADR allows for a clearer understanding of the drivers of change in prices over the lodging cycle," said John B. (Jack) Corgel, PhD., the Robert C. Baker professor of real estate at the Cornell University School of Hotel Administration and senior advisor to PKF-HR. An analysis of STR and Bureau of Economic Analysis data over the past 25 years reveals that, during the expansion phase of the economic cycle, real ADRs rarely increase at a rate of more than 2.0 to 2.5 percent. The two exceptions have been during the dot.com bubble of the late 1990's and during the real estate bubble of 2007 and early 2008.

"With this history, U.S. hoteliers should not be surprised with the current pace of real ADR growth, which by any measure has been extremely attractive. The recent good news is expected to continue; in fact, it might even be better. However, the short-term gains of an ADR bubble do not offset the pain experienced when the bubble eventually bursts," Corgel warns.

Variation by Market

The historical lag in nominal ADR growth also becomes evident when observing room rates across the 50 markets for which PKF-HR produces a Hotel Horizons® forecast. As of year-end 2012, only 10 of the 50 Horizons® markets had returned to the peak nominal ADR levels they had achieved prior to the recession.

"It is not surprising that gateway cities such as San Francisco, Los Angeles, Oahu, Boston and Miami experienced significant growth in nominal room rates during the past few years," noted Woodworth. "However, cities like Pittsburgh, Portland and Indianapolis also are among the 10 markets that have achieved nominal ADR recovery."

Markets that continue to lag in ADR growth are Kansas City, San Diego, Tucson, Salt Lake City, Albuquerque, Philadelphia and Washington, D.C. Hotels in all seven of these cities are forecast to achieve ADR growth less than the pace of inflation in both 2013 and 2014.

The Bottom Line

Given the positive outlook for performance on the top line, PKF-HR also is able to affirm their forecasts for growth on the bottom line. From 2013 through 2015, PKF-HR is projecting double-digit annual gains in unit-level net operating income for U.S. hotels.

"If you think back to past summers, hotel managers were burdened with worrisome thoughts of S&P downgrades, election outcomes and looming fiscal cliffs as they prepared their budgets for the upcoming year. This time around, operators are reading about escalating home prices, the increased availability of credit, job growth and an acceleration of economic growth. While the recent run up in oil prices has caught our attention, we continue to believe what we have been saying consistently since 2011, that the year 2014 will be a great year for the U.S. lodging industry," Woodworth concludes.



ABOUT PKF CONSULTING USA, LLC

Headquartered in San Francisco, PKF Consulting USA, LLC (www.pkfc.com) is an advisory and real estate firm specializing in the hospitality industry. PKF Consulting USA is owned by FirstService Corporation (FSRV) and is a subsidiary of Colliers International. The firm operates two companies: PKF Consulting USA, LLC and PKF Hospitality Research, LLC. The firm has offices in New York, Boston, Indianapolis, Chicago, Philadelphia, Washington DC, Atlanta, Jacksonville, Tampa, Orlando, Houston/Dallas, Los Angeles, Bozeman, and San Francisco.