PKF: Hotel Occupancy To Dip In 2007

A new PKF Hospitality Research analysis forecasted that hotel occupancy rates for 52 major domestic markets would dip 0.6 percent year over year in 2007, spurred by a 2 percent increase in new room supply that is absorbing a predicted 1.4 percent room occupancy growth. While the small decrease in occupancy rate should gladden corporate travel managers looking to negotiate favorable rates, some analysts expect it will have the reverse effect and lead hoteliers to raise rates even more.

"The cycle is similar to roughly 10 years ago, during the recovery from the 1991 recession," said Robert Mandelbaum, director of research information services for PKF. "Hotel occupancies are running high, so yield-management programs start to kick in, and this is the time when hoteliers typically get aggressive with regard to room rates and push them up." Mandelbaum said that the decline in occupancy would prompt hotel managers to sacrifice a few occupancy points in order to boost average room rates. "We're at the top of the cycle where suppliers still have the leverage, so it's probably still not a great time for corporate travel managers. We are not seeing the kind of new room supply growth one would typically expect in this cycle, which makes for favorable market conditions for hoteliers. Unless demand drops dramatically, you're going to see hotel managers become more aggressive with room rates over the next two years or so."

While PKF is forecasting a slight decline in occupancy rates, it still is projecting a 68 percent occupancy rate for 2007. "At that percent, the average hotel will have a few more rooms available to sell in 2007 versus this year," said Mark Woodworth, president of PKF. "However, travelers should still expect to face capacity situations in most cities." Although PKF's model projected a slight national average decline, 24 of the 52 major cities tracked are predicted to experience upticks in occupancy rate. PKF's model didn't track suburban and tertiary properties, which would deflate occupancy rates. PricewaterhouseCoopers, which forecasts based on national aggregate, predicted a 64.5 percent domestic occupancy rate for 2007.

Another factor is that occupancy rates in most cities have reached, or are approaching, levels of maximum capacity. "Hotels can only get so full. There's only so much that occupancy can grow because hotels are never going to reach 100 percent occupancy," said Mandelbaum.

While occupancy levels won't ever reach absolute capacity, hotel companies still are benefiting from a robust economy that, although slightly ebbing, is delivering healthy profits into hotel company coffers. "The fact is that we are approaching the peak of the current business cycle, and a slowdown in the pace of growth would not be difficult to imagine," said Woodworth. "That being said, the U.S. lodging industry is still forecast to realize continued growth in revenues and profits."