Magazine article Real Estate Issues

Focus on Hospitality: Moderating Profit Growth Expected until 2001

Magazine article Real Estate Issues

Focus on Hospitality: Moderating Profit Growth Expected until 2001

Article excerpt

After a slow second-quarter performance, growth of the U.S. economy accelerated in the second half of 1999. Real gross domestic product (GDP) grew at an annual rate of 4.1 percent in 1999, fueled by increased inventory buildup and export activity as well as continued robust consumer and business spending. The pace of economic activity in the U.S. will continue to remain strong at least until 2001 as overseas economies gain momentum; Macroeconomic Advisers anticipates real GDP to slow slightly from 1999 to 3.4 percent in 2000 and 2.8 percent in 2001.

The anticipated solid performance of the U.S. economy in the next two years will stimulate lodging demand growth as well as encourage continued development initiatives. Room rate advances will continue, but there will be a tighter spread between average room rate growth and inflation in the next two years. Although profit margins are not expected to improve significantly going forward, aggregate industry profits will continue to rise at a compound annual growth rate of 8.3 percent.

MODERATING RevPAR GROWTH

After peaking at 6.1 percent in 1996 in the current cycle, the growth of U.S. revenue per available room (RevPAR) has been trending down as the high level of hotel construction has adversely affected occupancies and room rate growth in most lodging markets. Beginning in 1996, U.S. demand growth failed to keep pace with the supply expansion. The net increase in supply from 1996 to 1998 was almost 292,000 rooms, representing a compound annual growth of 4.1 percent. By comparison, the industry's historical supply growth average from 1975 to 1998 is 2.8 percent.

Occupancy dropped 1.2 occupancy points to 63.9 percent in 1998 from 65.1 percent in 1996. Room rate increases also slowed to 4.4 percent in 1998 from 6.5 percent in 1996. The combination of lower occupancy and modest average daily rate (ADR) gains caused RevPAR growth to slide from 6.1 percent in 1996 to 3.6 percent in 1998.

1999 PERFORMANCE

Statistics from Smith Travel Research (STR) show a continuation of these trends in 1999. The stronger supply gro wth (+3.9 percent) relative to demand growth (+3.5 percent) pushed down occupancy rates, thus limiting the industry's ability to raise room rates and RevPAR. The occupancy in 1999 fell 0.5 occupancy point to 63.4 percent, while ADR increased only 3.9 percent to $81.07 in the same period one year earlier. As a result, RevPAR advanced by only 3.2 percent. In inflation-adjusted terms, RevPAR increased 1.0 percent. (Tables 1 and 2 summarize the 1999 performance indicators.)

The performance in 1999 was mixed within price segments. Both budget and economy segments achieved the highest inflation-adjusted RevPAR growth (+3.0 percent and +2.3 percent, respectively), benefiting from healthy ADR gains. On the other hand, luxury, upscale, and midprice properties sustained below-average inflation-adjusted RevPAR increases. Though room demand was exceptionally strong in these segments, room supply expanded even faster. These led to large occupancy declines, which in turn inhibited room rate increases among these properties.

By region, strong ADR growth allowed New England, Mountain, Pacific, and Middle Atlantic regions to outperform the overall industry in terms of real RevPAR growth (+6.2 percent, +2.1 percent, +1.7 percent, and +1.7 percent, respectively) in 1999. In contrast, hotels in the East South Central and West South Central reported declining real RevPAR growth as both regions suffered weak occupancies and ADR performance.

In terms of location, resort properties registered the highest real RevPAR growth (+1. …

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