Hotel Starts, Occupancy Decrease During Downturn
<B>Hotel Starts, Occupancy Decrease During Downturn</B>
By Bruce Serlen
Travel buyers seeking to gain leverage in rate negotiations with their hotel vendors should not rejoice at the news that occupancy rates are on the decline. A decrease in room starts probably will balance out any leverage that lower occupancies might have given them.
According to lodging industry projections announced last month, the number of new room starts in U.S. hotels will drop significantly in 2001.
"Room starts are expected to experience a 12.8 percent decline from last year," said Lorraine Bardeen of PricewaterhouseCoopers' financial advisory services group. By year-end, the supply of hotel rooms nationally is projected to have grown only 2.5 percent.
The slowdown is anticipated across all regions of the country and in all segments of the industry, with one exception being the surge in new projects announced by deluxe hotel companies (BTN, April 23).
Meanwhile, the latest reports on hotel occupancy that were issued by Smith Travel Research show that rates in March fell in 17 of the 25 major markets in the country, compared with the same period last year.
"With all the talk of occupancy rates falling in key U.S. markets, the plus for the industry is that the supply rate is going down simultaneously," said Daniel Lesser, senior director of the hospitality industry group at Cushman & Wakefield Inc., a real estate services firm. "New supply is on the decrease, but in such key markets as New York a lot of supply had come online recently, so there is still supply to be absorbed."
The situation is tight particularly for new construction financing as opposed to financing for other purposes. "If a construction deal hasn't been financed, it's going to be difficult to move forward. Funding for acquisitions and renovations might be easier to obtain," Lesser said.
Because they're less capital-intensive to build, the prospects for financing limited service properties are a bit brighter. "In many instances, developers can do it out of their own cash," according to Lesser.
"Developer caution about definitively committing to a project going into an economic downturn and a period of falling consumer confidence has resulted in many developments being put on hold or canceled," said Bear Stearns lodging industry analyst Jason Ader.
Relatively speaking, the drop in hotel occupancy rates in the United States poses a much more serious dilemma for the lodging industry suppliers than does the decline in supply, according to industry observers.
"There's a preoccupation with the supply side that isn't fully warranted," said Jack Corgel, managing director of the Hospitality Research Group, which is a unit of PKF Consulting. "In 1997, 1998 and the early part of 1999, there were heavy additions on the supply side, so the number of rooms is still up."
Halting the development process is a "natural response" to what is occurring on the demand side, Corgel said. "Demand for rooms is taking really serious hits, certainly in the gateway markets," he said. "But there's also likely to be a ripple effect where demand falls in other markets." New York, Chicago and Boston, in addition to San Francisco, are most frequently cited as the markets that have seen significant demand erosion. However, "the situation is hardly limited to these top cities," Corgel said.
Looking down the road, neither Bear Stearns nor PricewaterhouseCoopers see the room starts situation improving anytime soon.
"We believe that supply growth will continue to decelerate in 2002 as constrained capital limits new project development," Ader said. Lower supply growth may be a benefit to existing hotel owners, but he sees it presenting a challenge to such large multi-brand companies as Marriott International and Hilton Hotels Corp. "They need to drive unit growth in order to maintain earnings momentum," Ader said.
According to PricewaterhouseCoopers, the number of hotel rooms is expected to grow in the next few years at even lower rates than the 2.5 percent projected for 2001. Specifically, room starts are projected to grow 2.2 percent in 2002 and 2 percent in 2003 over the prior year. These estimates factor in the number of hotel rooms completed, less the number of rooms removed from circulation for various reasons. By contrast, hotel room starts grew by 3.6 percent and 2.9 percent in 1999 and 2000, respectively.
Last month, PricewaterhouseCoopers also revised downward its projections for growth in revenue per available room for the second quarter of the year. The PwC hospitality practice said it now expects revenue per available room to decline 1.8 percent for the quarter, which would be the lowest quarterly decline since 1992. Ironically, RevPAR growth was 7.2 percent in the second quarter of 2000, the strongest quarterly growth since 1987.