13 Apr, 2012By: Robert Mandelbaum
Rising occupancy levels will enable hotel managers in the nation’s major markets to significantly raise their room rates in 2012. The average daily room rate for hotels in the 50 metro areas for which PKF Hospitality Research prepares a Hotel Horizons fore- cast is projected to increase 5.3 percent in 2012. This compares to an ADR increase of just 2.7 percent for all other U.S. hotels located outside of these 50 markets. Favorable supply and demand conditions in the large metro areas during 2010 and 2011 have set the stage for the strong 2012 ADR forecast.
The impact of the lack of financing that started to choke the development pipeline in 2008 became evident in 2011. According to Smith Travel Research, the supply of hotel rooms in the nation’s major markets increased by just 0.8 percent in 2011. This is less than half the long-run average annual increase in supply, and the lowest year-over-year growth rate since 1995.
Of the 50 cities in the Horizons universe, only six markets are projected to see their lodging inventory increase by more than 2.0 percent in 2012. New Orleans is forecast to experience the greatest increase in supply (4.9 percent) because of the residual impact of the re-opening of the 1,193 room Hyatt Regency in the fall of 2011.
Conversely, PKF-HR expects a reduction in the room count in eight metro areas during 2012. In several market areas, we are observing the temporary closing of hotels that have recently been purchased and are scheduled for major renovations. The upgrades in facilities and services are designed to reposition these properties in the marketplace upon reopening.
Concurrent with the lack of new supply has been a surge in demand in the major lodging markets. In previous articles we have documented the strong recovery of the nation’s coastal and gateway cities from the depths of the 2009 recession. This has helped to buoy the overall average growth in demand for all 50 Horizons markets. During the past two years, lodging demand in the nation’s major metro areas has increased a cumulative 14.9 percent.
Lodging demand in the major markets is forecast to increase by 2.5 percent in 2012. New Orleans and Miami are leading demand growth. Special events and a strong convention calendar are driving the demand for hotel rooms in New Orleans, while the growing economy in Brazil is stimulating significant levels of visitation to Miami.
Relative to 2010 and 2011, the 2.5-percent demand growth rate forecast for 2012 looks small. However, the overall occupancy level for the 50 major lodging markets is projected to reach 66.3 percent during the year. This is nearly one percentage point above the 65.4-percent long-run average occupancy level as reported by STR. In fact, 28 of the 50 cities in our Hotel Horizons universe are forecast to exceed their long- run average occupancy level in 2012.
With occupancy levels in so many cities expected to exceed the long-run average, we are seeing operators increase rates. ADR for the largest hotel markets is forecast to rise 5.3 percent in 2012, almost twice the STR long-run average of 2.8 percent, and 3.2 percentage points above the pace of inflation.
ADR is forecast to grow in excess of 8.0 percent during 2012 in four of the 50 Horizons markets. With occupancy levels nearing or exceeding the 80 percent mark in San Francisco, Miami and Oahu, property managers in these cites certainly posses the leverage to push room rates. We also expect New Orleans hotels to benefit from premium pricing during their special events and achieve an annual ADR increase of 8.6 percent.
High development costs, zoning and scarcity of affordable capital typically impede development in larger metro areas. These factors will continue to limit the amount of new competition. With occupancies approaching all-time highs, PKF-HR forecasts major market ADR will continue to grow in excess of 5.0 percent through 2015.