Lodging
Trends
Lodging Stocks
According to Ernst & Young�s Lodging Stock Index, small-cap, mid/large-cap
and REIT lodging stocks consistently outperformed the S&P 500 in the
year-to-date prior to September 11th (9/11). The week following the tragic
events, however, stocks plunged to 52-week lows, declining by as much as
36 percent as in the case of REIT stocks. Mid/large-caps and small caps
did not fare well either, as they experienced declines of 28 percent and
13 percent, respectively. For the remainder of 2001, lodging stocks observed
a steady recovery, led primarily by the small cap sector, which was the
only segment to surpass pre-9/11 levels and continue to outperform the
S&P 500. Despite improvements in lodging stocks, mid-term performance
is anticipated to remain slightly below pre-9/11 levels due to the impact
of an exacerbated decline in the economy, continued reluctance to travel
and the overall discounting of lodging stocks by investors. Although there
continues to be some good �buy� opportunities among major hotel stocks,
investors should be cautious as loan defaults in early 2002 may further
discomfort the financial markets and push stock prices down. Decreasing
hotels values, nonetheless, may eventually turn out to be positive to hotel
owners, as they may be able to obtain reductions in assessed values and
receive substantial real estate tax savings. If the economy recovers substantially
in the first half of 2002, E&Y believes much of this value loss will
be recovered.
Hotel Values
Given increasing cash flow volatility, E&Y anticipates substantial
erosion in hotel values in the near-term. In the aftermath of 9/11, hotel
properties are anticipated to trade at discounts to construction costs
given that an economic rebound may take longer than originally expected.
These transactions, however, will not be as deeply discounted as in the
early 1990s�when values decreased by as much as 30 percent � due to more
responsible underwriting criteria in recent years. Luxury hotels have been
the hardest hit given their dependence on transient leisure and upscale
corporate demand, while limited-service and budget hotels have been able
to better maintain their values. In aggregate, E&Y expects a 15 percent
to 20 percent reduction in hotel values as a result of recent events.
Acquisition Activity
Transaction activity in the lodging sector came to a halt in 2001 and
many lenders remain skeptical of our industry, as evidenced by a reduction
in LTV lending thresholds and an increase in surveyed capitalization and
discount rates from recent transactions. This may prove to be an excellent
time for opportunity-funds and opportunistic buyers to focus on select
assets at attractive discounts. Although sellers remained quite inflexible
prior to 9/11�generally unwilling to reduce their asking prices�owners
have now realized that the sector may take longer than anticipated to rebound
and may be more willing to strike deals. The investment community, however,
wants to see clear signs that the sector has bottomed out before making
serious hard asset commitments. E&Y believes that timing may prove
to be right for larger deals during the second quarter of 2002.
Development Pipeline
The lack of readily available hotel financing in today�s environment
has been a catalyst in the decline of lodging projects in the development
pipeline over the last two quarters of 2001. Projects seeking financing
are being forced to re-evaluate the feasibility of their deal and recalculate
their revenue and cash flow projections to take into account uncertain
economic conditions. Only owners and developers with a history of sound
balance sheets will have access to capital. E&Y anticipates this trend
to continue until hotel occupancies recover in the latter part of 2002
and early 2003. Upscale and luxury hotels, which suffered the largest occupancy
losses, accounted for the bulk of projects to be placed on the back burner.
On a positive note, a thinner pipeline will help to mitigate the effects
of demand declines and will play a role in the eventual stability for major
urban and resort markets that were being swamped with additional supply.
Defaults and Foreclosures
E&Y�s initial read is that defaults and foreclosures are not yet
occurring at any substantive pace. The abrupt slowdown experienced by the
lodging sector, however, has negatively impacted RevPARs and further thinned
debt service coverage ratios. Upper-upscale properties are at greater risk
as corporate travel continues at levels below those of 2000 and properties
are striving to maintain rate integrity and service levels in the face
of necessary layoffs. Independent chains without broad distribution in
multiple segments, small properties worth less than $10 million without
deep operating reserves and hotels with poor management or no brand affiliation
are also at an increased risk for loan defaults. Although lenders typically
wait approximately 90 days on delinquent loans before foreclosing, E&Y
anticipates significant maneuvering from borrowers to obtain extensions
or special arrangements with their lenders. With this traditional grace
period expiring in the first quarter of 2002, unless the industry observes
a turnaround in business in the spring, some hotel failures could happen.
E&Y anticipates loan defaults to more than double in 2002 despite recent
tighter lending standards of 50 percent to 60 percent loan to value versus
70 percent to 80 percent loan to value ratios of several years ago.
Mixed-Use Developments
Multiple income streams generated from mixed-use developments have typically
increased the attractiveness of many projects, as cash flows from distinct
property types diversify risk exposure from any one real estate component.
In the midst of a severe downturn for the lodging industry following 9/11,
however, third party lenders will more closely scrutinize hotel components
within mixed-use developments. Hotel construction is frequently funded
with proceeds from residential sales early in the construction or pre-construction
phase, thereby providing the funding necessary for the hotel component.
The U.S. economic slowdown, however, is putting the brakes on new home
sales, especially in the upscale and luxury markets, further siphoning
financing available for hotel construction. In the mid and long-term, mixed-use
development residential sales are anticipated to improve as the �empty
nester,� Baby Boomer generation begins to seek smaller residences with
the convenience of nearby retail and entertainment outlets. In the interim,
E&Y anticipates that mixed-use developers will face continued strains
financing their project�s lodging components, resulting in potential delays
and cancellations.
Cost Containment
Payroll has been the major focus of cost containment for most hotel
chains. It is estimated that more than one-third of the 260,000 hotel and
restaurant workers represented by the Hotel Employees and Restaurant Employees
International Union had lost their jobs as of December 2001. Cutting staffing
levels by furloughing (temporary layoffs), reducing schedules of hourly
employees, requiring mandatory vacations and cutting overtime have proven
to be effective and inexpensive solutions to improve the bottom line. Clustering
employees (e.g. sharing employees among area hotels) is another effective
solution to reduce costly overhead. Removing turndown service, closing
food and beverage outlets for certain meal periods, reducing hours of operation
for businesses such as health clubs, and gift shops or eliminating 24-hour
room service are additional cost reduction measures that are helping operators
bridge the revenue and expense gap in a time of lower demand and, subsequently,
rates. E&Y is working to assist operators to develop and refine
new and flexible strategies of cost containment that will ultimately strengthen
the industry during the next cycle of revenue and profit growth.
Energy Savings
The stellar performance experienced in our industry for the past years
coupled with the fact that energy expenses typically represent a small
portion of a hotel�s operating expenses-generally between four percent
to five percent of revenues�has resulted in complacency by operators to
reduce energy use and improve operational efficiency. Rarely have energy
issues been at the top of the priority list amongst hoteliers. During these
trying times, however, operators have come to realize that they lack the
necessary information to make strategic decisions about energy use. Defining
a structured and detailed energy strategy, focusing on supply sourcing,
conservation, implementation, and capital financing, can result in substantial
savings for the bottom line in the long term. These measures can reduce
operating costs, increase efficiency and improve the indoor environment
without compromising business objectives. E&Y estimates that cost savings
ranging from 15 percent and 20 percent can be achieved by successfully
implementing energy strategies in hotel properties.
Security
On 9/11, a fundamental change occurred in the lodging industry. While
managers previously focused primarily on personal guest security at the
operational level, the events of 9/11 have forced hotel management companies
to reconfigure their security efforts with a greater understanding of �strategic�
or public security. While important, no longer do anonymous room keys and
guestroom door peepholes seem to be the priority. Instead, the role, risks
and exposure of the hotel as a high profile public use building is the
topic of the day in a society still dealing with the realities of terrorism
on its soil. This new security paradigm will undoubtedly be an integral
component of overall asset strategy, as its strength or weakness will also
affect asset value. E&Y anticipates that substantial changes will occur
in the near future including more stringent hotel construction and design
standards, comprehensive layout analyses, bomb threat procedures and evacuation
training, and passive security systems for hotel properties.
Insurance Premiums
Hotel owners had no way of foreseeing the large increases in insurance
premiums for 2002. Although insurance premiums have been on the rise in
the past years�as a result of various economic factors and increased insurance
claims�it was the events of 9/11 that have forced insurance companies to
significantly increase their rates in 2002. National carriers are already
demonstrating their lack of appetite for insuring the lodging industry
by reducing coverage or withdrawing altogether from the sector�making it
much harder for hoteliers to find proper coverage for their properties.
E&Y anticipates that insurance premiums may increase by as much as
50 percent in 2002 for all policyholders, including those with good track
records. These increases will directly affect the bottom line and challenge
some operator�s ability to meet debt service obligations. As a result,
hoteliers must be knowledgeable about renewing their policies and identify
solutions that will neither leave them vulnerable and under-insured, nor
create a heavy financial burden. As such, in certain circumstances, hotel
companies may want to consider accepting larger deductibles to offset rate
increases, implementing improved procedures to minimize potential losses
and discussing their insurance needs with multiple carriers to promote
competition and reduce premiums.
Lodging
Industry Outlook
What began as economic trepidation in the second quarter of 2001 has
now, due to both foreseen and unforeseen circumstances, stood the lodging
industry on its heels. In short, barring any future terrorist attacks on
U.S. soil, the only silver lining for an industry left unbalanced by recent
events is that the operating environment may slowly be on the road to improvement.
For less efficiently managed or over-leveraged hotel assets, the skies
are still dark and, unfortunately, still ominous.
Ernst & Young LLP anticipates that in the next 12 months the industry
will begin to slowly reach normalization, with more foreseeable travel
patterns and stabilizing corporate and leisure travel. The overall industry,
however, is not anticipated to reach 2000 levels anytime soon. Stable RevPAR
growth will reverse the upward trend experienced in the past seven years.
Luxury and first-class properties, in particular, will experience substantial
declines and cost overruns, creating significant challenges for the bottom
line in these sectors. With these obstacles ahead, entities will need to
continue to focus on operational strategies and manage cost levels for
the foreseeable future. Economy and limited-service segments are anticipated
to weather the storm somewhat faster, particularly those properties in
drive-in markets and those that are gaining the benefit of �trade-down�
among corporate travelers, such as midscale properties with food and beverage
operations. A thinner development pipeline should prohibit occupancies
from further declining in 2002 as demand begins to rebound during the third
quarter.
Occupancy Stabilizes
An economy first weakened by the economic slowdown and then further
by the shock of the events of September 11 and the ongoing United States
war in Afghanistan will continue to cloud the industry�s prospects for
recovery in 2002. Supply growth has slowed to 2.4 percent in 2001, while
room demand has observed negative growth of 3.5 percent, significantly
weakening fundamentals. U.S. occupancy declined significantly from 63.7
percent in 2000 to an estimated 60.1 percent at year-end 2001, lower than
1991 levels of 61.8 percent, the recessionary year of the Persian Gulf
War.
In 2002, supply growth is anticipated to moderate as the development
pipeline had already thinned last year in response to a tighter lending
environment. Today, there are less hotel rooms under construction than
any time during the past three years. Furthermore, markets on the verge
of oversaturation prior to September 2001 are anticipated to experience
more modest supply growth as more challenging market fundamentals weed
out those with weaker deal structures.
In terms of demand, reductions in air-travel, corporate belt-tightening,
a fear of flying and continued lay-offs are anticipated to contribute to
an elongated recovery timetable. The following factors are anticipated
to be the primary drivers of recovery.
-
The general state of the U.S. economy;
-
The scope and length of U.S. military action; and
-
Air capacity in light of recent airline cutbacks.
The second half of 2002 through early 2003 should bring improved performance
to the lodging industry as supply growth slows significantly to 1.5 percent
and demand exhibits growth of 1.2 percent, resulting in soft but stable
occupancy expectations of 59.9 percent for 2002.
ADR (Average Daily Rate) Slightly Increases
In 2000, the national ADR reached $86. Rates declined during 2001, as
a slow rebooking pace subsequent to 9/11 forced hoteliers to offer more
attractive room rates for both transient leisure and commercial segments,
resulting in an estimated ADR of $85 in 2001�a 1.2 percent decline from
the prior year.
Significant declines in ADR will continue throughout the first and second
quarters of 2002 as operators have already renegotiated group and contract
rates for this period. As demand slowly recovers, we expect hoteliers to
be able to maintain their rate integrity in the second half of the year,
resulting in little or no rate growth overall for 2002 (approximately 0.3
percent). Luxury and first-class lodging properties will continue to feel
the impact of corporate belt-tightening, while economy and limited-service
properties will remain more resilient to travel cutbacks.
RevPAR (Revenue Per Available Room) Stagnates
RevPAR in the industry reached a high of $55 in 2000, a 6 percent increase
over the prior year. In the aftermath of recent events, RevPAR declined
considerably to $51 in 2001, an estimated decline of 6.8 percent compared
with 2000. During the first and second quarters of 2002, RevPAR should
decline and then recover slightly, resulting in little overall change for
the year. Airport, urban, and resort markets such as Miami and Hawaii�typically
more dependent on air transportation�continue to be most susceptible, while
hotels situated in regional drive-in markets may be able to rebound better
into 2002.
Industry Profits: Goodbye Glory Days
After nearly a decade-long streak of increasing revenues and profits,
the lodging industry�s watchword is caution. Profits for 2001 are estimated
to be $18.4 billion, down significantly from $22.5 billion in 2000, while
2002 profits are anticipated to be $19.9 billion. Profit growth will
increasingly become a function of efficient expense management, as well
as extremely limited new development in select areas.
Final Thoughts
The lodging industry has not experienced zero RevPAR growth in more
than a decade; however, the unforeseen circumstance in which the industry
finds itself is one of the greatest demand challenges it has ever faced.
Before the economy and world events settle to the point where the American
public is willing to resume business and leisure travel in force, lodging
managers will be left focusing on the expense side of the operation to
squeeze additional value from their operations, continuing a decade-long
focus on operational re-engineering, financial restructuring, and a highly
disciplined adoption of appropriate new technologies.
Lodging
Industry Segment Reports
Overview
The Luxury segment�s performance, already exhibiting signs of over-supply
in 2001, was further weakened by the events of September 11 following declines
in transient leisure and executive-level corporate demand. Operating margins
for the segment are anticipated to be placed under pressure in 2002 given
the high fixed costs associated with luxury operations and the minimal
RevPAR growth anticipated for the sector.
Service Standards � The labor-intensive nature of the segment
has increased the pressure on luxury hotel operators to maintain their
service standards in the face of necessary layoffs. As such, property managers
are being forced to manage their staffs more efficiently by cross-training
and creating multi-tasking job descriptions in an attempt to not compromise
service levels. As labor costs represent a large portion of a luxury property�s
variable costs, this creative approach by operators should minimize unnecessary
expenses due to operational inefficiencies and help the bottom line.
Luxury
Source:Smith Travel Research,Lodging Econometrics,Ernst
&Young LLP
Occupancy and Rate Decreases � Occupancy in the Luxury segment
is anticipated to continue to decline in 2002, as a result of reduced transient
corporate travel and the use of meeting alternatives, such as video conferencing,
by the corporate market. For the first time in more than seven years, ADR
decreased for the segment due to rate discounting measures associated with
recent events. The resulting pressure on the bottom line has forced some
owners and operators to offer room blocks through online clearinghouse
services, a trend which is anticipated to continue through 2002.
Performance
Luxury hotels are anticipated to suffer the second largest occupancy
decline among lodging segments in 2001, after the Resort segment. Occupancy
should drop 10.1 points to 62.6 percent in 2001 as a result of the economic
recession, lack of consumer confidence and oversupply in major markets.
These declines are anticipated to continue in 2002, resulting in an occupancy
of 62.1 percent for the year. Although room rates are anticipated to decline
4.0 percent in 2001, ADRs should observe a modest 1.5 percent increase
to $248 in 2002, as demand picks up during the third and fourth quarters
due to an economic recovery and improvements in business and consumer confidence.
Despite the anticipated occupancy declines, the modest ADR growth is expected
to result in a 0.6 percent RevPAR growth in 2002 to $154.
Outlook
As the Luxury segment is not anticipated to rebound until 2003, the
near-term focus should be on maintaining market share in light of supply
increases. The segment will be under pressure, however, given its limited
flexibility to lower overhead through labor reductions given its high service
standard requirements.
Development Pipeline � In 2001, sales for mixed-use luxury developments
were temperate as investors pulled away from Luxury market investments.
Residential sales, however, are anticipated to rebound in the third and
fourth quarters of 2002, bringing much needed investment for these projects,
as Baby Boomers seek low maintenance, convenient second residence options
with the convenience of nearby retail and entertainment outlets. It is
anticipated that urban markets such as San Francisco, New York and Miami,
will be saturated with new Luxury supply in 2002, due to the new development
in the late 1990�s spurred by a booming U.S. economy, with little
hope that fundamentals will find their balance through 2003.
Operational Challenges � Luxury hotel operators and owners are
anticipated to face significant operational hurdles as they struggle to
maintain service standards while still providing acceptable bottom line
results. Hoteliers are anticipated to focus on yield management and cost
containment issues to improve operational efficiencies, while hotel owners
may look into asset management services to protect their investments.
Overview
With a large portion of its demand base consisting of commercial group
demand, reductions in corporate travel and meeting expenditures have resulted
in a direct impact on the First Class lodging segment. Following the events
of September 11, many fourth quarter 2001 meetings were either postponed
until later in the year or early 2002 or were cancelled altogether. Meeting
and conference absentee rates have also increased, as air travel continues
to be depressed and corporate budget constraints result in lower convention
attendance. In light of these events, hotel operators will be under pressure
to lower rates by corporate meeting planners who are in the process of
renegotiating contracts.
Trade Downs � The First Class segment stands to lose a portion
of its demand to consumers who are directed to trade down to the Upscale
segment during these difficult times. As the First Class segment consists
of several chains that offer strong guest loyalty programs, it is also
likely that consumers will trade-down to more economical brands within
the same corporation.
Slowing Pipeline � The First Class segment�s development pipeline
increased at a rate of 2.7 percent in 2001, while additions to supply during
2002 are estimated to increase at the lowest growth rate since 1998, 1.8
percent, with the addition of over 8,500 rooms. A more constrained pipeline
in 2002 is primarily the result of a stricter lending environment for this
segment following the uncertainty related to the slowing economy and the
events of September 11.
First Class
Source:Smith Travel Research,Lodging Econometrics,Ernst
&Young LLP
A decline of 9.0 percent in room demand coupled with an increase of
2.7 percent in room supply resulted in an anticipated occupancy of 64.5
percent in 2001, over eight percentage points below 2000 levels.
Rate discounting by hotel operators also contributed to a 4.1 percent decline
in ADR to $143, resulting in an overall estimated RevPAR decline of 14.9
percent in 2001. A constrained pipeline, coupled with an anticipated 2.5
percent increase in demand, should lead to a modest increase in occupancy
of approximately 0.5 percentage points to 65.0 percent in 2002. ADRs are
also anticipated to experience modest growth of 1.5 percent to $145, positively
impacting RevPAR performance to $94.
Outlook
A recovering economy and rebounding corporate travel anticipated for
the latter part of 2002, should help the sector recover some lost ground
in rates. Transient leisure is also expected to assist the segment�s recovery,
as a rise in leisure travel should help boost occupancy and lead to rate
growth.
Convention Space � New convention and meeting space additions
are anticipated to further generate commercial demand, leading to a rebound
in meeting and convention activity by late 2002 or early 2003. Approximately
94 convention centers will be expanded, renovated or constructed within
the next ten years throughout the U.S. The McCormick Place Convention Center
in Chicago, for example, will add over 800,000 square feet, making it one
of the largest meeting spaces in the nation, with a total of approximately
3 million square feet.
Declining Profit Margins � The First Class segment is anticipated
to experience moderate declines in average profitability per property and
more frequent cost overruns in the near-term, given its high overhead expenses
associated with labor costs, further challenging the bottom line. As such,
First Class hotel operators must continue to focus on cost containment
strategies in order to soften the impact of lower to stable demand on gross
operating margins. With profitability anticipated to decrease in the short-to-mid
term, lowering debt service coverage ratios, we believe that there will
be a moderate number of debt restructurings, foreclosures and assets purchased
by opportunistic buyers for the end of the first quarter and second quarter
of 2002. Conservative hotel lending criteria, including higher debt service
coverage requirements and lower loan-to-value ratios, have nonetheless
yielded more rational, stable debt and equity structures for the majority
of hotel properties. In addition, E&Y anticipates significant
maneuvering from distressed borrowers to obtain extensions or special arrangements
with their lenders and avoid defaults in the in the First Class segment.
Overview
The development pipeline for the Upscale segment has moderated in the
past 24 months allowing the market to better absorb the new supply introduced
in 1999. Although the segment will experience some supply growth in 2002,
demand is expected to outpace supply, strengthening the sector�s fundamentals
and poising it for a rebound in the second half of 2002, with RevPAR increasing
moderately from 2001 performance levels.
Trade-downs � As some corporate travelers trade down from Upscale
to Midscale hotels, to comply with corporate travel restrictions, hoteliers
will have a greater propensity to offer rate discounts to retain corporate
accounts. Although operators in general strive to maintain rate integrity,
some are aggressively discounting room rates to stabilize occupancy and
ancillary revenues. With less airport traffic in 2002, airport hotels in
major hub cities such as Atlanta and Dallas, will continue to see a negative
impact on ADRs and less volume from airline crew accounts.
Amenities � For management companies that can procure the necessary
funds, either from reserve accounts or from ownership, 2002 will be a
great time to improve facilities through value-added refurbishment.
Given a more challenging operating environment, operators should first
attend to basic guest demands such as adopting more stringent cleaning
and laundering standards, and subsequently offer valued amenities such
as smart rooms equipped with cordless telephones, high speed internet access
and voicemail systems to try and improve market share.
Performance
Occupancy should increase slightly by 0.1 percentage point to 64.7 percent
in 2002, as room demand is anticipated to increase by 6.0 percent, outpacing
a 5.8 percent growth in supply. In 2001, occupancy declined an estimated
5.6 percentage points to 64.6 percent and, although room rates decreased
an estimated 0.6 percent in 2001 for the first time in four years, ADR
is anticipated to increase by 1.0 percent to approximately $99 in 2002.
Adverse economic conditions in 2001 resulted in an estimated RevPAR decline
of 8.6 percent to $63, but as occupancy and rate are anticipated to recover
as the year progresses, RevPARs are anticipated to reach approximately
$64 in 2002.
Upscale
Source:Smith Travel Research,Lodging Econometrics,Ernst
&Young LLP
Outlook
As fundamentals improve with additions to supply remaining in check
and demand growth beginning to improve by mid-year, a rebound beginning
in the second half of 2002 should position the Upscale segment on the path
to recovery.
Acquisitions and Consolidations � With asset prices generally
anticipated to decline during the first quarter of 2002, the industry should
be ripe for consolidation, with Six Continents Hotels and their funds from
their brewery divestiture leading the effort. Possible brand consolidation
may also take place, with multi-brand lodging corporations assessing whether
some of their niche brands are generating sufficient brand equity to justify
the operational and marketing costs to operate them separately from core
brands.
Extended Stay � Upscale corporate extended stay properties may
suffer initially from office vacancies in major urban areas, which are
anticipated to reduce corporate business demand for this growing segment.
Value-added amenities such as full- or mini-kitchens, Internet-ready telephones
and grocery shopping services, should continue to sustain the competitiveness
of these properties, poising them to benefit from the anticipated rebound
in corporate demand by the second half of 2002. As these properties operate
with lower fixed costs than other hotels within the Upscale segment, thus
achieving higher gross margins, they are anticipated to weather 2002 better
than traditional hotels.
Overview
Demand in the Midscale lodging segment is anticipated to be the most
resilient during 2002, as the recent shift in business travel patterns,
in response to constrained corporate travel allocations, positively impacts
the sector. Midscale properties are anticipated to observe signs of recovery
by the second quarter of 2002, resulting in modest RevPAR increases for
the year.
Conversions � The Midscale with Food and Beverage segment experienced
a loss of more than 12,000 rooms between 1998 and 2001, representing a
cumulative supply decline of approximately 1.9 percent, as a result of
outdated properties and brands that converted to Midscale without Food
and Beverage or Economy hotels. Existing properties in the Midscale with
Food and Beverage segment have been adversely affected by a lack of attention
to product renovations and upgrades, rendering them less competitive with
the product characteristics of new Midscale without Food and Beverage facilities.
Franchising � The Midscale segment is dominated by franchising
companies that have substantial recognition yet often lack the necessary
differentiation to allow for a clear distinction across products. Instead,
similar property types with thin price differentials have encouraged a
commodity-type environment, as consumers tend to not discern any unique
benefit or characteristics of one brand over another.
Lending Environment � The lending environment for the Midscale
segment remains reasonably optimistic given the right local market conditions.
Although it is anticipated that limited debt capital for the right projects
will be made available to the segment throughout 2002, lender conservatism
will rightfully reign in certain saturated markets.
Performance
The Midscale with Food and Beverage segment was already observing year-to-date
occupancy declines of 2.4 points prior to the events of September 11. Following
the attacks, however, more substantial declines in demand were observed,
leading to an estimated occupancy of 55.7 percent for the year. In 2002,
however, room demand is anticipated to increase by 3.0 percent over 2001
levels, with a moderate 0.7 percent growth in supply, resulting in an increased
occupancy of 57.0 percent. ADRs are also anticipated to experience modest
inflationary growth of 2.5 percent to $75, as demand recovers during the
second and third quarters of 2002. The rebounds in ADR and occupancy, led
by increased demand and moderate supply growth, are anticipated to result
in a relatively strong performance for the segment given current economic
conditions, a 4.9 percent RevPAR growth in 2002 to $43.
Midscale with Food and Beverage
Source:Smith Travel Research,Lodging Econometrics,Ernst
&Young LLP
The weakening economy contributed to a decline of 2.5 occupancy points
for the Midscale without Food and Beverage segment in 2001, to 62.1 percent.
In 2002, however, room demand is anticipated to increase by 7.0 percent,
outpacing a 6.6 percent estimated growth in supply and resulting in a 0.2
percentage point increase in occupancy to 62.3 percent. ADRs increased
3.4 percent in 2001 to $69, as demand remained increasingly resilient in
the fourth quarter of 2001, a modest positive trend expected to continue
in 2002, as ADRs increase 2.5 percent to $71 and RevPARs increase by 2.9
percent to $44.
Midscale without Food and Beverage
Source:Smith Travel Research,Lodging Econometrics,Ernst
&Young LLP
Outlook
The Midscale segment is anticipated to perform relatively well in 2002,
with the Midscale without Food and Beverage surprisingly outperforming
the RevPAR levels of the Midscale with Food and Beverage segment. Strong
brand names are expected to play major roles, although a lack of product
differentiation will continue to present challenges to operators. The implementation
of operational efficiencies is anticipated to be particularly crucial for
the Midscale segment, as occupancy levels anticipated for 2002 remain below
recent historical levels of performance.
New Supply � The Midscale without Food and Beverage segment added
the largest number of rooms of any industry segment since 1998, representing
an estimated cumulative growth of 43.9 percent, or 168,000 rooms, through
2001. During the same period, however, demand is anticipated to experience
a cumulative increase of only 34.2 percent, resulting in a downward trend
in occupancy. While declines in demand pointed to a necessary moderation
in the segment, as fundamentals can rapidly change given the sector�s shorter
construction timeframe.development pipeline, the Midscale without Food
and Beverage segment continued to add more rooms during 2001, albeit at
a slower pace due to tightening public financing sources. This construction
boom has been driven by public lodging companies with high growth strategies
aimed at not just improving their market presence and brand recognition
but also to pleasing Wall Street with short term improvements in year-over-year
revenue growth. Certain overheated markets such as Orlando, will continue
to face the negative effects of an oversupplied market, leading to continued
price-based competition.
Overview
Despite an industry-wide decline in leisure and commercial travel, the
Economy segment is anticipated to experience one of the most moderate RevPAR
declines in 2002, followed by the Midscale without Food and Beverage segment.
This modest decrease is attributed to the resilient characteristics of
the segment�an affordable, leisure-and commercial-oriented product that
relies mostly on regional drive-in demand rather than fly-in demand�as
well as moderate trade down from users of Midscale products. Hotel values
within this sector have also been maintained in the past years, as a result
of strong supply and demand fundamentals and horizontal brand extension�the
creation of new products, such as extended stay properties, within the
same sector-which has prevented deep rate discounting in the segment.
New Supply � The Economy segment has observed strong supply growth
since 1998, especially in markets with low barriers to entry. In the mid-term,
however, the development pipeline is expected to cool down leading to reasonable
stability in 2002. Despite this positive trend, operators should closely
monitor new developments in the segment, as fundamentals can rapidly change
given the sector�s shorter construction timeframe.
Travel Patterns � As business travelers conform to tight corporate
travel budgets, the focus has shifted to value; recently opened properties
with high curb appeal, marketed and flagged with well-known national brands,
are anticipated to increase their local market penetration in 2002 as a
result of consolidated marketing and reservations systems. As travelers
seek short vacation options close to home and opt for drive-to versus fly-to
destinations, Economy properties proximate to or within regional resort
areas should observe improved occupancies in 2002. RevPARs are anticipated
to surpass 2001 levels beginning as early as the first quarter of 2002,
as limited supply growth and increased demand from a shift in travel expenditures,
strengthens the segment�s fundamentals.
Performance
Occupancy decreased to an estimated 56.0 percent in 2001 from 58.1 percent
in 2000. In 2002, room demand is anticipated to increase by 3.5 percent,
outpacing a 1.7 percent growth in supply, leading to an increase in occupancy
of 1.7 percent to 57.0 percent. ADRs increased marginally in 2001 by approximately
0.5 percent, the lowest increase since 1998, as the events of September
11 stifled prospects for higher real rate growth. In 2002, however, ADRs
are anticipated to grow 3 percentage to $49, the highest ADR growth since
1998, as the segment should be the first to begin recovering from the difficult
fourth quarter of 2001. RevPAR is anticipated to decline 3.2 percent in
2001 to an estimated $27, primarily attributable to a 3.7 percent decline
in occupancy. Occupancy and ADR growth in 2002 are anticipated to yield
a $28 RevPAR for the segment, the highest level since 1998 and an estimated
4.8 percent increase over 2001.
Economy
Source:Smith Travel Research,Lodging Econometrics,Ernst
&Young LLP
Outlook
Recent additions to supply have introduced appealing, fresh products
into the Economy lodging segment. As such, both leisure and corporate transient
travelers have found the segment to be a satisfactory substitute for more
costly lodging products. This trend has carried the Economy segment through
the challenging periods of 2001 and will continue to sustain its performance
through 2002 as travel rebounds.
Operating Margins � As properties within the Economy segment
typically operate at higher aggregate margins than other segments that
include food and beverage operations, ADR improvements are anticipated
to generate moderately higher profits in 2002. Lower fixed costs associated
with the Economy segment allow operators to benefit from more efficient
operations. As the Economy segment continues to be populated with independent,
small operators, their properties often prove to be the most resilient
in hard times as they are able to streamline their operation, reducing
overhead costs associated with maintaining the standards of a franchise
affiliation.
Overview
Declines in discretionary income and spending during 2001 have led to
a decrease in demand for the Resort segment during 2001, which is anticipated
to continue throughout 2002. Furthermore, additions to supply�a development
market inefficiency due to the long lead time to plan, design, construct
and open a new project�are anticipated to cause the Resort segment�s recovery
pace to lag other lodging segments, with recovery not anticipated to take
shape before early 2003.
Development Pipeline � Due to the nation�s sustained economic
growth during most of the 1990s and the previously existing development
opportunities in certain resort markets, the segment�s active pipeline
includes more than 9,500 rooms to be introduced to the market in 2002.
Certain markets are particularly oversupplied with Resort properties, driving
down the segment�s rates. Phoenix, for example, is anticipating approximately
2,200 additional resort guest rooms by 2003. Even previously resilient
destinations such as Las Vegas and Orlando, are experiencing supply-demand
issues, as leisure travelers stay closer to home and corporate and incentive
meetings are postponed, cancelled or made more modest. The more conservative
attitude toward incentive meeting spending is also in response to corporate
image concerns of frivolous spending in times of war and recession.
Brand Affiliation � During 2002, chain-affiliated resorts are
poised to benefit from brand name recognition and nationwide reservation
systems, while high profile independent resorts attempt to drive revenues
without the additional franchise fees burdening the bottom line. Both chain-affiliated
and independent resorts, however, will face cost containment challenges,
as high overhead ancillary departments such as golf, spas and other recreational
operations suffer with the decreases in occupancy.
Performance
Occupancy is anticipated to experience the largest declines of any segment,
approximately 11.4 percentage points, in 2001, while ADR should observe
the lowest growth rate in four years, a modest increase 1 percent. The
resulting estimated decline in RevPAR is approximately 15.6 percent for
2001. An anticipated 10.5 percent increase in supply, coupled with a 6.5
percent increase in demand, should result in a 3.6 percent decline in occupancy
to 55.9 percent in 2002. ADRs are anticipated to experience a modest gain
of 1.0 percent to $191. As the Resort segment�s recovery period is only
anticipated to begin in early 2003, RevPAR is estimated to decline 2.7
percent in 2002 to $107, the lowest estimated RevPAR in recent years.
Resort
Source:Smith Travel Research,Lodging Econometrics,Ernst
&Young LLP
Outlook
It is anticipated that commercial group business will help begin to
place the Resort segment back on track toward the latter part of 2002 and
early 2003, as the U.S. economy begins to strengthen and corporations become
more aggressive in scheduling face-to-face meeting activity. In addition,
if resort properties with sufficient capital reserves to complete needed
renovations take advantage of the current window of opportunity, as a result
of lower occupancies, they may well gain market share and be better poised
to capture the additional demand anticipated for 2003. In the near-term,
resorts located proximate to higher-income urban areas, such as San Diego,
Santa Barbara, Las Vegas, Cape Cod, the Hamptons and others are anticipated
to recover sooner than dedicated fly-in markets such as Miami and Hawaii.
Mixed-use Resorts � Resort communities that are integrated with
substantial fractional vacation ownership properties, such as the Ritz-Carlton
Bachelor Gulch and the Four Seasons Aviara, are anticipated to fare better
than stand-alone resorts in 2002. Not only are high-end resort consumers
less price-sensitive but fractional owners who utilize resort amenities
also generate significant ancillary revenue.
Resort properties with land available for development may consider creating
mixed-use environments with the addition of diversified products such as
residential, retail, golf or marina components. While capital is limited
under current circumstances, certain projects still make sense. The Greenbrier
Resort, for example, recently announced the addition of 400 to 500 residential
homes, boosting the resort�s overall value and guaranteeing additional
contribution to the resort�s ancillary departmental revenues.
The Ernst & Young 2002 National Lodging Forecast contains an analysis
of data compiled from many sources, including Lodging Econometrics and
Smith Travel Research. The content of this forecast is for reference only,
not to be used as business advisement or to set standards on policies or
actions. Statistics provided by Lodging Econometrics represent projects
in the Development Pipeline as of September 30, 2001. Caution should be
utilized when forecasting the number of projects that will actually come
to fruition. Based on historical experience, the attrition rate for projects
In Permitting can be up to 25% and the attrition rate for projects in Early
Planning can be up to 60%. |