US Hotel Performance – Time for a Baseline Reset?

Smith Travel Research (STR) does an exceptional job of tracking and sharing US hotel industry performance statistics on a weekly basis. October and early November normally represent the highest occupancies and average rates for US hotels as corporate travel and meetings business kicks into full gear. Unfortunately, 2009 is different. Over one year after the collapse of Lehman Brothers, even with the US economy showing some signs of stabilization, the United States hotel industry appears to be getting a preview of what can only be described as “The New Normal.”

Last July, I blogged about my concerns that hotel room rates were declining faster than occupancies. That undesirable trend has now continued in all except three of the past 19 weeks – and those three weeks can be explained by holiday date shifts.

Looking at the country as a whole, hotel average room rate and occupancy percentage declines have not yet stabilized – even compared against the lower basis established by last year’s precipitous drops. The declines are not as steep as those sustained last year, but they have not yet bottomed out.

Before digging into the significance of the weekly trends and their relationship to performance experienced in prior downturns, there are now predictions available from the major hospitality industry consulting groups for 2009 and 2010 performance to consider.

STR’s October forecast projected 2009 occupancy to decline by 8.4% to 55.4%, ADR to fall 9.7% to US$96.43, and RevPAR to decrease 17.1% to US$53.43. These were the result of a projected 3.0% growth in 2009 US hotel room supply, accompanied by a 5.5% drop in guest room demand.

Below is a breakdown of actual US hotel industry performance on a quarterly basis, including STR’s forecast for the full year 2009. All three key metrics have fallen in each quarter throughout the year, with the rate of decline slowing for occupancy while the average rate declines accelerate.

STR 2009 US Hotel Performance by Quarter (YOY Comparison)

	Occupancy	Occ %Chg	ADR	ADR %Chg	RevPAR	RevPAR %Chg
1st Quarter	51.4%	-10.9%	$100.13	-7.7%	$51.44	-17.7%
2nd Quarter	57.8%	-10.9%	$97.37	-9.7%	$56.25	-19.5%
3rd Quarter	60.5%	-7.9%	$96.84	-9.8%	$58.61	-16.9%
2009 Forecast	56.6%	-8.4%	$98.01	-9.7%	$55.48	-17.1%

Source: STR

The Smith Travel numbers are more pessimistic than the statistics released by PriceWaterhouseCoopers (PWC) with 2009 full year predictions of -8.4% Occupancy, -8.8% ADR, and -16.4% RevPAR repsectively. It is unclear however, why the PWC projections are more optimistic than STR’s, as both groups estimate demand to dropby 5.5%. Interestingly, PWC predicts 3.2% hotel supply growth in 2009, which is greater than STR’s 3.0% growth rate forecast. Increased supply growth relative to consistent demand declines would logically result in greater downward pressure on hotel occupancy. As a result, the PWC projections appear optimistic.

PWC’s forecast also provides some excellent perspective on how the US hotel industry has fared since 2000.

PwC U.S. Lodging Forecast

	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010
Occupancy	63.3%	59.8%	59.1%	59.2%	61.4%	63.1%	63.3%	63.1%	60.3%	55.2%	55.8%
ADR Growth	+5.4%	-1.4%	-1.5%	+0.2%	+4.2%	+5.5%	+7.5%	+6.2%	+2.7%	-8.8%	-1.8%
RevPAR Growth	+6.1%	-7.0%	-2.7%	+0.5%	+7.9%	+8.5%	+7.8%	+5.8%	-1.8%	-16.4%	-0.7%

Source: PWC

Both the STR and PWC statistics are more optimistic than those presented by PKF Hospitality Research (PKF) where 2009 dives of -9.0% for occupancy, -10.4% in ADR, and -18.5% RevPAR losses are predicted. Like STR, PKF also sees 3.0% hotel supply growth in 2009, but the more pessimistic forecast is driven by room demand dropping by an estimated 6.3%.

Looking forward to 2010? You must not be a Hotel Owner…

PKF’s Robert Mandelbaum during his recent American Hotel & Lodging Association Leadership Forum presentation put it most eloquently: “next year is going to suck.”

As strong as that statement may be, STR produced lower 2010 performance projections when compared against both PKF and PWC. STR combines the lowest 2010 demand growth forecast at 1.3%, coupled with the greatest 2010 supply growth prediction at 1.8%.

Aligning the PKF and STR forecasts, the formula for calculating next year’s US hotel industry performance appears to be:

Sucks – $4.15 RevPAR = 2010 US Hotel Performance…

The following table summarizes the STR, PWC & PKF 2010 forecasts:

Forecast Change in Key Metrics – 2010 US Lodging Industry

	Supply	Demand	Occ	Occ %Chg	ADR	ADR %Chg	RevPAR	RevPAR %Chg
STR	+1.8%	+1.3%	55.1%	-0.6%	$93.16	-3.4%	$51.33	-4.0%
PWC	+1.4%		55.8%	+1.1%		-1.8%		-0.7%
PKF	+1.2%	+1.7%	55.2	+0.4%		-3.1%		-2.7%

Sources: STR, PWC, PKF

All three firms concur that the average daily rate and revenue per available room will fall further in 2010 when compared with 2009. While only STR predicts all three key metrics falling in 2010, one can conclude that PWC and PKF are relying on demand growth during the latter half of 2010 to keep the occupancy above the 2009 levels. I do not see any evidence from 2009 indicating future strength in demand during fall 2010.

Peak Fall Demand in 2009 Compared to “Normal”

The term “stabilization” is typically used to describe metrics that have reached equilibrium, but that is not an accurate characterization of the US hotel industry at the present time. Stabilization should not be confused with a return to normal trading conditions prior to the downturn. Seeing 2009 weekly occupancies, average rates and RevPARs continue to decline relative to 2008 results does not give me a feeling of stability.

While some travel industry pundits and hotel brands describe seeing “a light at the end of the tunnel,” fall 2009 US hotel performance statistics are not feeling the love. While whatever lights are being witnessed do not appear to be the raging fires of hell, all indications are that it will take a considerable amount of time for the US hotel industry to recover 2007 performance levels.

The five week early October – early November period (tracked as weeks 40 through 44) historically reflects some of the strongest periods of business and group segment hotel demand. During 2007, all five weeks saw ADR’s exceed $107.00. In week 43 of 2006, the ADR peaked at $102.25; the same year, one week earlier, RevPAR peaked at $71.48. Longer term averages also have a tendency to peak during the period – for example, the 12-month moving average for occupancy peaked at 63.99% in week 40 of 2007.

Weeks 40 through 44 also represent the first weeks when the impact of the global financial crisis, typified by Lehman Brothers bankruptcy, rocked the US hotel industry. Week 40 of 2008 was the first in recent, or distant, memory to see year over year ADR fall. The previous week (39) of 2008 marked a milestone by generating a peak ADR of $111.25; the 12-month moving average for ADR also peaking the same week at $106.68. As these were the first weeks to be impacted, they offer an opportunity to provide early signals of recovery.

The following table illustrates the dramatic decline in occupancy percentage, average daily rate and revenue per available room for the years 2006 through 2009 over the five week peak fall travel period (weeks 40 through 44.)

Weekly US Hotel Performance Metrics 2006-2009 (YOY Weeks 40-44)

YEAR	WEEK		ACTUALS			YOY COMPARISON
#	Ending	Occ %	ADR	RevPAR	Occ %	ADR	RevPAR
2009
44	31-Oct	51.8%	$98.99	$51.28	-7.2%	-7.2%	-13.8%
43	24-Oct	59.0%	$100.04	$59.03	-6.3%	-8.3%	-14.1%
42	17-Oct	58.9%	$99.14	$58.42	-8.1%	-8.5%	-16.0%
41	10-Oct	59.8%	$99.21	$59.28	-5.4%	-7.0%	-12.0%
40	3-Oct	55.8%	$95.51	$53.50	-5.8%	-8.3%	-13.7%
2008
44	1-Nov	55.9%	$106.45	$59.53	-7.3%	+0.7%	-6.6%
43	25-Oct	63.1%	$107.01	$68.76	-6.6%	-0.4%	-7.0%
42	18-Oct	64.2%	$108.61	$69.76	-7.3%	+0.1%	-7.1%
41	11-Oct	63.3%	$106.28	$67.24	-7.2%	-1.0%	-8.1%
40	4-Oct	59.4%	$103.90	$61.70	-11.1%	-2.4%	-13.2%
2007
44	3-Nov	60.4%	$105.46	$63.75	-0.6%	+6.1%	+5.4%
43	27-Oct	67.8%	$109.17	$74.05	+0.7%	+6.3%	+7.0%
42	20-Oct	69.5%	$108.15	$75.17	-0.8%	+5.6%	+4.8%
41	13-Oct	68.4%	$107.08	$73.22	-0.3%	+5.9%	+5.6%
40	6-Oct	67.1%	$108.90	$73.05	+1.0%	+11.0%	+12.1%
2006
44	4-Nov	61.0%	$98.94	$60.35	-3.0%	+6.4%	+3.2%
43	28-Oct	67.5%	$102.25	$69.04	+1.7%	+9.1%	+11.0%
42	21-Oct	70.3%	$101.73	$71.48	-0.4%	+7.2%	+6.8%
41	14-Oct	68.8%	$100.25	$68.94	+1.2%	+10.3%	+11.5%
40	7-Oct	66.5%	$97.78	$65.03	-2.6%	+7.4%	+4.5%

Source: STR

As US hotel performance typically weakens as the 4^th quarter advances and the 1^st quarter begins, there is not yet sufficient evidence that a bottom has been encountered. I sincerely hope it has, but the data – especially during this peak demand period – fails to supports that contention.

Compared to Past Economic Downturns – Not a pretty picture

Two indicators have been developed to measure the health of the hotel industry and provide leading directional information. The Hotel Industry’s Pulse (HIP) and Hotel Industry Leading (HIL) both track multiple economic variables on six-month moving average basis. The HIL is expected to lead the HIP by four to five months. The HIL has now been tracking positive since April, and after 19 consecutive months of decline, the HIP turned positive in July – hailed as a first sign of a turning point. The HIP continued upward in August, reinforcing the optimism, but then suddenly lost 2.1 percent in September, while HIL continued to rise. Something fundamental has changed that may have undermined the predictability of these models – at least until a new normal is established and the models defining the relationship between hotel industry performance and the behavior of the underlying economic components can be adjusted.

The US hotel industry has never experienced a downturn of this magnitude. Through September, the 12-month moving average for hotel occupancy fell 9.4%; the moving average for ADR was down 7.4%. The month of October brought a consistent loss of occupancy, but ADR continued to fall. This compares to a total 6.8% decline in occupancy and a 4.7% decline in ADR following the September 2001 terror attacks and 3.4% occupancy and 0.1% ADR drops following the 1991 Gulf War.

This recession is already considerably longer and deeper than these other downturns, and a bottom has not yet been reached. The longer the decline continues, the longer it will take the industry to recover lost ground.

The figure below shows the 12-month moving average tracking change in US hotel industry occupancy percentage and ADR back to 1989.

So Where’s the Recovery?

This recession will not bottom out until supply and demand reach equilibrium. A slowing rate of decline does not provide a sound foundation for future growth. The US hotel business can only recover when hotel room demand begins to grow faster than the supply of available rooms.

On the supply side, it is interesting to note that US active hotel development pipeline in October 2009 was down 32.7% compared with October, 2008. The STR/Torto Wheaton Research/Dodge Construction report shows that the number of rooms under construction actually fell 41.2% due to difficulty in securing financing and city approvals. The 1.8% supply growth forecast by STR in 2010 is not based on the introduction of too many new projects, but counter-intuitively, on too few closings.

In his AH&LA presentation, STR President Mark Lamanno quoted an executive from hotel operator John Q. Hammons, who stated the US hotel industry is “not overdeveloped, just under demolished.”

Simply put, the problem is that a sizeable number of hotels remain open despite not being financially viable operations. Logic would hold that these hotels should be closed, converted for other uses or demolished. An interesting question will be if the growing number of opportunistic Hotel Acquisition Funds shopping for distressed properties at bargain prices will manage to rescue failing hotels and continue operations. While this helps to support employment and avoid the eyesore of derelict hotels, hotels acquired at fire-sale valuations stay in the supply pool and are capable of sustaining cash flow at comparably lower average rates.

This “excess supply” structurally depresses market occupancies by their presence in the general room supply. Oversupply also contributes to falling average room rates when competitive properties are not able to maintain viable occupancy levels. In many cases, desperate distressed property owners create downward pressure on competitive hotel rates by dramatically reducing prices in an effort to stimulate demand and/or shift market share.

The impact of such moves can also affect hotels beyond the property’s normal competitive set. If the distressed hotel is in the luxury or upscale segment, drastic rate reductions can potentially shift share from midscale hotels as some guests may choose to trade up in quality for the same price point. Rates become further compressed if an impacted mid-scale property reacts to the loss of occupancy by reducing its rates, attempting to reestablish its value proposition relative to the new competitive pricing strategy. The problem is that the competitor’s pricing decision may not have much to do with strategy. During the 1980’s US hotel recession, we characterized this scenario as the “death spiral” when an unhealthy, or poorly managed, hotel dragged others down into a distressed state through its irrational pricing actions.

Demand remains the critical question. Warren Marr of PricewaterhouseCoopers also weighed in on the issue at the AH&LA Leadership Forum. When analyzing 2009’s drop in occupancy, 81% was attributed to a falloff in group business. While there have been some reports from hotel company earnings calls that group booking levels are beginning to increase, there are no indications that group volume can be expected to return to its previous level. The greatest question is if the cancellation / postponement of group travel will lead to a rebound as organizations make up for lost opportunities, or if the increase in social media, collaboration tools and continued fiscal restraint will have organizations deeming various conventions, meetings and conferences as non-essential – trips for at least some number of traditional participants.

Below is a chart of seasonally adjusted monthly US room demand since January, 2001.

Smith Travel Research continues to provide an invaluable service to the global hotel industry. Almost more important than their dutiful collection of weekly statistics, Randy Smith, Mark Lomanno and their team generously share key metrics and trends at industry conferences and through their HotelNewsNow website. Hopefully they will have better news to report in 2010.

My predictions? Based on the industry performance statistics available, looking at a 12-month moving average, I see occupancies bottoming out in mid-2010, with average rates trailing by 6 months. Hoteliers will need to wait until 2011 to see RevPAR beginning to trend upward again. Not to be overly pessimistic, but it looks like a decade may pass before inflation adjusted hotel rates return to the levels experienced in 2007.

As a result, the US hospitality industry will need to adapt to the “new normal.” With continuing pressure on business and group travel expenses, more value oriented leisure travelers, and properties fatigued from deferred capital spending and stripped-down operating budgets, relying on traditional operating and service delivery processes creates a recipe for disaster. There is no better (or more needed) time for innovation.

While the challenges may be formidable, hoteliers will be best positioned to succeed during a recovery if they:

• maintain strategic focus
• listen to and engage their customers
• run efficient operations
• demonstrate restraint when faced with potentially illogical or disruptive competitive actions

Having a patient owner, a strong balance sheet and positive cash flow wouldn’t hurt either.”