Analysts See Declining Occupancy

<B> Analysts See Declining Occupancy</B>

By Maria P. Vallejo

For the hospitality industry, 1998 promises to bring back much of 1997's fervor for acquisitions and mergers, the continual rise of the hotel real estate investment trust, reduced occupancy, possible overbuilding and increased room rates, according to the industry's top analysts.

While many hotels enjoyed high occupancies, last year's percentages indicated a downward trend in overall national occupancy. According to New York-based Coopers & Lybrand's industry forecast, 1997's occupancy declined to 64.5 percent from 65.1 in 1996, and will fall to 63.5 percent this year (see chart, page 1).

Analysts did not expect such a rapid decline in occupancy, which will be exacerbated by a stream of new supply in certain market segments. "This has been a greater drop than we had been forecasting," said Bjorn Hanson, New York-based Coopers & Lybrand's hospitality industry chairman. "We have unfavorable trends. We have more supply than anticipated and some slowing of demand."

The Pacific, Mountain and Mid-Atlantic states are expected to suffer the greatest occupancy decline this year. Analysts based their speculation on the percentage each region held of hotel national room supply versus the percentage of rooms in a start-up status and planning stage. The start-up status indicated hotels in construction or expected to start construction within 60 days of the study.

"Those markets are going to experience the deepest decline in occupancy," Hanson said. "We continue to have some concern in the Mountain states, but now we have the Pacific area and the Middle Atlantic with a large premium of starts."

Likewise, San Francisco, Los Angeles, Boston and Denver are among the cities projected to have the highest growth in average room rates this year, according to New York-based PKF Consulting's State of the Hotel Industry report.

Chuck Ross, Smith Travel Research's vice president, concurred with the Mountain state hypothesis of overbuilding and declining occupancies, but disputed the Pacific overbuilding speculation. Both the eastern and western coastal regions are still underserving their current demand and an injection of supply would benefit the region's occupancy rate, he said.

According to Smith Travel Research's "Lodging Outlook," room supply eclipsed demand and occupancy declined last year in the South Atlantic, Mountain and Central regions.

"As a generalization, the coastal regions, East Coast and West Coast, are where we're seeing supply growth not quite keeping up with demand growth," Ross said. "The interior regions are where we see the most supply/demand imbalance."

Aside from regional areas threatened by overbuilding, particular market segments are also at risk. The influx in the economy and midpriced markets have made them primary targets for overbuilding speculation. By year-end the midpriced market segment is expected to account for 969,400 rooms and the economy segment is expected to close with 620,100 rooms, according to Coopers & Lybrand's study. By the end of 1999, midpriced rooms will exceed 100,000 and there will be more than 720,000 economy rooms.

Although previously predicted, the budget segment eluded expected overbuilding, and hoteliers' development interest moved to the next two segments.

"There's a lot of new construction over the last few years. It's been ending up to be in the economic or midpriced grouping," Ross said. "A new lot of people are trading from older budget type hotels into those. There isn't much new construction in the budget group. The demand is shifting from there to economy and midpriced. Those two categories present some risk to being overbuilt in some markets."

Rates Still Climbing

As in most years, major business destinations have no concerns about overbuilding, declining occupancies or stagnant room rates in 1998. In fact, a survey by New York-based American Express Travel Related Service Co. Inc. of the top 25 U.S. business destinations--including Atlanta, Chicago, Los Angeles, New York and San Francisco--showed they are expected to experience a 13 to 15 percent corporate rate increase over 1997. The preliminary forecast, which studied the United States only, predicted the average corporate room rate will increase by only 3 to 5 percent. Those key cities are projected to reach 80 to 83 percent occupancies.

"If companies haven't negotiated discounts with hotels for 1998, their travelers will be subject to the highest year-over-year increase that we've ever forecast for the hotel sector," said Eric Altschul, American Express Corporate Services' vice president.

American Express spokesperson Melissa Abernathy said travel managers will eventually have to start searching for cheaper, secondary locations for accommodations and meetings. "Travel managers are going to have to look at suburban properties during the off-peak season. They're going to have to look for opportunities just like with airfare. Travel mangers need to communicate to travelers to look for better deals."

Occupancies and room rates were not the only areas analysts delved into for speculation. Last year's numerous mergers and acquisitions are not expected to come to a halt. About 17 major acquisitions took place last year and 11 mergers are pending or were recently completed, according to Coopers & Lybrand data. "The merger/acquisition activity has been phenomenal," Hanson said. "We thought 1996 was a great year. There are a phenomenal level of mergers occurring."

Some analysts speculated that the acquisitions will create more difficulty for travel managers in negotiations. A large hotel company will have the vested power to determine room rates for numerous markets and hotel segments, especially if it has a diversified hotel portfolio.

"The acquisition is really like a PacMan game," Ross said. "All these bigger companies are gathering power pellets. The speed, volume and size of these acquisition has been quite astounding. In the future there will be more difficulty negotiating with those groups because they have more hotel rooms in larger areas."

Last year's major players, including Patriot American, Hilton Hotels and Starwood Hotels & Resorts Worldwide, made this year's analysts "ones to watch" list. Although some analysts believe the rate of acquisition will decrease this year because of fewer available companies for purchase, none of the aforementioned companies are expected to remain silent.

Beverly Hills, Calif.-based Hilton Hotel Corp., which lost the battle for ITT Corp. last year, is expected to concentrate on growing the company through acquisition. "For so long they were focused on the ITT acquisition," Ross said. "I think that they'll start to focus on their growth strategies in the next year or two."

Among the list of companies to watch next year are paired share real estate investment trusts Starwood Hotels & Resorts Worldwide and Patriot American. The two trusts helped shake up the industry in 1997 by purchasing brand names and educating the public about the perks of their unusual tax advantaged structure. Paired share REITs are not expected to go on hiatus any time soon. Both are expected to continue growth through acquisition.