Originally published in AAHOA Lodging Business, January 2007

Lodging Industry Forecast

The U.S. Economic slowdown is not expected to intercept the U.S. lodging industry expansion, however a slowdown in the rate of RevPAR growth is forecast.
Anthony Rodolakis, Ph.D.

During the first half of 2006, the U.S. lodging industry experienced 9.0 percent revenue per available room (RevPAR) growth compared to 7.8 percent during the same period in 2005, the year when the industry achieved overall RevPAR growth of 8.5 percent, the highest ever based on Smith Travel Research (STR) data.

According to STR, 16 of the top 25 markets experienced double-digit RevPAR growth during the first half of the year with Houston, Texas, leading all top 25 markets with a growth rate of 23.9 percent.

Over the last several quarters the lodging expansion has been premised on average daily room (ADR) gains. According to PricewaterhouseCoopers' research, ADR's contribution to RevPAR growth will be 79 percent in 2006 up from 64 percent in 2005. During periods of lodging expansion and when occupancies remain strong across markets, ADR growth tends to be the main driver of RevPAR growth as was evident in the late 1990s when ADR's contribution to RevPAR growth 137 percent in 1998.

The lodging industry is highly cyclical and contingent upon the health of the overall economy. Therefore, a careful monitoring of consumer spending and investment, both business and leisure related, provides insights as to the future trends of the travel industry in general and the lodging industry in particular.

The U.S. economy slowed significantly during the second quarter of 2006 with real gross domestic product (GDP) growth of 2.9 percent, following an unsustainably strong 5.6 percent growth during the first quarter of 2006. A combination of higher energy prices, increasing interest rates, weakening housing markets and a volatile stock market, argue for slightly below-trend economic growth through 2007.  (See Graph 1.)

According to Macroeconomic Advisers LLC, the U.S. economy is forecast to increase by a slightly below trend 3.0 percent in 2007. However, a careful examination of the quarterly numbers supports the position that the overall economic fundamentals will remain relatively strong further supporting consumer and business spending and investment. This outlook is also supported by a favourable inflationary environment, partly based on a more optimistic energy-price outlook.

PricewaterhouseCoopers' latest forecast is for RevPAR growth of 8.7 percent in 2006 followed by growth of 5.9 percent in 2007. Room rates across geographical locations and segments are forecast to increase by 5.7 percent in 2007 following growth of 6.9 percent in 2006. Year-to-date through June 2006 supply additions were restrained at 0.4 percent, a low pace for this phase of the cycle, and are forecast to end the year at 0.8 percent.

Hotels continue to command significant pricing power as occupancies have reached record levels in many major urban centers. U.S. occupancy is forecast to reach 64.3 percent in 2007 the highest since 1996.

While full-service hotels, especially in the higher priced tiers of major urban centers, have significantly benefited from the current economic and lodging fundamentals, all six chain scale segments as well as independent hotels continue to benefit. According to STR, during the first half of 2006 the luxury segment led all segments with a RevPAR gain of 11.8 percent, followed by the midscale without food and beverage segment with an 11.7 percent increase. (See table.)

PricewaterhouseCoopers' latest forecast calls for a reduction in the rate of RevPAR growth for all six chain scale segments. The luxury and midscale without food and beverage segments will lead all other segments with growth rates of 8.3 percent and 7.9 percent, respectively. All segments are forecast to experience an acceleration in room supply additions however in all cases such additions are expected to be in line with historical averages.

PricewaterhouseCoopers forecasts a 12.7 percent increase in U.S. lodging industry net profits to a record $25.5 billion in 2006.  Profits per room are expected to increase by 11.1 percent to $5,705, reflecting a 0.8 percent increase in supply. Robust profits growth reflects a combination of RevPAR growth of 8.7 percent in 2006, continued more diligent management control over costs than is typical for this phase of the lodging cycle.

PricewaterhouseCoopers forecasts an additional 7.8 percent increase in industry profits in 2007 to another record of $27.5.  The lower percentage increase in profits reflects slower RevPAR growth and continued high costs experienced in 2006, plus anticipated additional increases for direct payroll and interest costs.

Anothy Rodolakis, Ph.D., is the research manager for Hospitality & Leisure Consulting with Pricewaterhouse Coopers LLP. He can be reached at (813) 222-6226 or via e-mail at anthony.rodolakis@us.pwc.com.


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