Quarterly Trends in the Hotel Industry provides current information on average daily room rates and occupancies in a comparative year-to-date format. It was developed to help hoteliers, financiers, and investors evaluate current trends in the hotel industry. Data used to delineate these trends were compiled from hotels throughout the United States.
The often touted recovery for the U.S. hotel industry is almost there. Most of the fundamentals are in place:
With all these positive trends occurring, surely average room rates must go up. The question is not will they increase, but when will they increase?
Everything Is Peachy, Except The Oranges
In 1994, the occupancy levels for most U.S. hotels are expected to increase over their 1993 performance levels. By the end of the year, the nationwide occupancy is estimated to increase 2.4 percent from year-end 1993. The jump in occupancy is due to a mere 0.6 percent increase in supply, coupled with a 3.1 percent increase in demand.
The lone exception to this widespread surge are the hotels located in the South Atlantic region. Hindered by a recession in Europe and the lingering negative publicity of attacks on tourists, visitation to such popular in-bound destinations as Florida and Washington, DC has been sharply reduced. This will result in an estimated 0.6 percent decline in the overall regional occupancy during 1994.
With all regional occupancies slowly approaching the 70 percent mark, little room is left for continued improvement. The rate of growth for U.S. hotel occupancy is projected to slow somewhat to 1.5 percent in 1995. Given the current lack of projects in the development pipeline, the supply of hotels is expected to remain virtually flat over the next few years. This should lead to a significant increase in the number of capacity situations.
The only piece of the recovery puzzle yet to be put into place is a substantial increase in average room rates. While rate improvement seems inevitable given the anticipated favorable balance of supply and demand, substantial gains are not projected by year-end 1994 or in 1995. Average room rates for the U.S. lodging market are estimated to increase only 1.9 percent by year-end 1994, and another 2.7percent in 1995. Rate growth in both of these years is projected to be less than the rate of inflation.
Is It A Plum, Or A Turnip?
U.S. hotel operators have increased their operational profit margins from 19.7 percent of total revenue in 1990 to 22.4 percent in 1993. The net result has been a 16.8 percent increase in profits per available room. The significance of this accomplishment is that it was achieved during a period of stagnant room rates and declining food and beverage sales. Faced with flat revenues, hotel managers cut their fixed expenses and improved productivity in an effort to control variable expenses.
With costs under control and occupancy gains limited, continued improvements in profitability will be tied almost exclusively to the ability to increase room rates. Given the continued skepticism of the traveling public and competitive tactics employed by some hotels, rate growth may not occur as quickly as desired. Therefore, sustained profit growth could become as difficult as squeezing blood from a turnip.
As the U.S. hotel industry approaches the top of the recovery cycle, it appears that the last part of the curve is the steepest. Occupancy and profitability gains have pushed the industry a long way from the depths of 1991. The growth in average room rates will determine the rate of ascent the rest of the way up.