Focus on Hospitality: Predictive Powers of Hotel Cycles

By Corgel, John B. | Real Estate Issues, Winter 2003 | Go to article overview

Focus on Hospitality: Predictive Powers of Hotel Cycles


Corgel, John B., Real Estate Issues


Whether we want to accept the fact or not the hotel business (both the sale of rooms and assets) is a cyclical business. Cycles exist in the hotel business for some good and well documented reasons. Most importantly, hotels are not the same as most other commodities like, say, tooth paste. By this I mean that when the demand for rooms suddenly spikes, as it did during the recent holiday season in New York City, the supply of rooms cannot correspondingly expand within a short period to satisfy the new level of demand. Should the same circumstances occur in the market for tooth paste, producers will turn up the machinery not operating at full capacity, add another work shift, and turn out more tubes before you can say 'dental bills.' Thus, hotel supply change lags demand in both the upward and downward directions meaning that RevPAR persists at relatively high levels and growth rates following an upward movement in demand and RevPAR persists at low levels and growth rates following a decline in demand.

[ILLUSTRATION OMITTED]

The cycle's story just told appears quite tragic unless participants are somehow clever enough to predict the turning points and avoid downturns and troughs. Despite the financial wreckage they created in the past, hotel cycles now generate some underappreciated predictive powers. These powers are fueled by the availability of Smith Travel Research and other data covering a complete cycle (i.e., down from 1987 to 1992, up from 1992 to 2001, and down from 2001 until quite recently). During the latest complete cycle, all the moving parts behaved much as economic theory suggests. If the hotel market recently made an upward turn at the bottom of the cycle as many feel, then we have in our possession the map of how a recovery will unfold. In this article, I attempt to use the knowledge gained during the latest complete cycle to chart a near-term course of events in the U.S. hotel market.

OCCUPANCY AND ADR CYCLING THROUGH TIME

The existence of hotel market cycles is a well-recognized phenomenon. (1) Smooth and regular fluctuations around an equilibrium level may occur for two reasons. First, a strong correlation exists between measures of national and local market economic activity (e.g., GDP, real personal income, and employment) and hotel demand. Consequently, cyclical patterns in hotel performance measures emanate from business cycle patterns through the demand side of the market. Second, supply changes should logically follow shifts in demand, albeit with long delivery lags. If the business cycle is smooth and construction predictably responds, then the hotel market cycle will have a correspondingly smooth appearance over time. (2)

[GRAPHIC OMITTED]

Abnormally wide swings in hotel market performance observed during recent decades occurred because of shocks to the economy and hotel markets. These events either impacted the supply of hotel rooms, demand for hotel room nights, or both. Government intervention of the early 1980s, for example, artificially inflated the supply of hotels. With occupancy already below normal levels in the late 1980s, the recession and Gulf War in the early 1990s stymied the market recovery. Similarly, the combined effects of the demand-based general economic recession beginning in 2001, the terrorist attacks in September 2001 that created a stigma on domestic and international travel caused demand for air travel to plummet, and the Iraqi war produced steep declines in hotel occupancy and average daily rate (ADR) during 2001 and 2002.

Exhibit 1 shows the cyclical patterns of occupancy and real ADR for U.S. hotels during the past few decades. The following observations come from an examination of these trends:

1. Occupancy has a definite cyclical pattern. This pattern appears smoother since the late 1980s, which may be the consequence of lower information costs. (3)

2. The pattern of real ADR also appears cyclical, albeit with an upward trend. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Focus on Hospitality: Predictive Powers of Hotel Cycles
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.