Lodging Outlook 2002: Occupancy Like 1971 Until 2003

Hotel analysts this month estimated that U.S. hotel occupancy rates and room revenues would decline in 2002, compounding the significant setbacks experienced by the industry in 2001. For buyers, the dour projections presented an opportunity to leverage their negotiating strength, assuming they could deliver market share gains to hotels with which they've negotiated rates.

"Occupancy will continue to decline to 59.6 percent, the lowest hotel occupancy level since 1971," said Bjorn Hanson, head of PricewaterhouseCoopers hospitality and leisure practice. This is down slightly from the 60.3 percent occupancy rate PwC expected the industry to record in 2001 and down considerably from the 2000 occupancy results of 63.7 percent, which was a very strong year for the industry. In 2001, the upper upscale and deluxe categories experienced the steepest drop, though all categories suffered. According to Hanson, the 2002 decline similarly will be felt across all lodging industry price points.

PwC, meanwhile, said it expected room revenues to decline 0.2 percent in 2002, following a steep 6.7 percent drop in 2001. In 2000, by contrast, room revenues shot up 6 percent.

Yet, Michael Rietbrock, lodging industry analyst for Salomon Smith Barney, said 2002 is likely to be a considerably less profitable year for hotel owners than 2001. "Profitability for most owners are likely to stabilize sometime during 2002 at levels 20 percent to 30 percent below 2001 peaks," said Rietbrock, who noted that midprice and extended stay properties with a major amount of drive-up business were significantly outperforming "big-box" urban properties.

The national economic recession, compounded by the September terrorist attacks, is mostly to blame for the negative performance. "Economic reports now indicate that the United States, in fact, has been in a recession since March 2001," said Anne Lloyd-Jones, senior vice president at HVS International, a consulting firm specializing in hotel valuation. "This actually can be interpreted as good news for the industry: It means that nine months of the recession are behind us."

Based on historical patterns, Lloyd-Jones said recessions typically last less than a year, so the end may be in sight. "There's diversity of opinion as to whether the recovery will begin this quarter of 2002 or the next quarter, but most experts agree the recovery will be well underway by the end of the year," she said. Given these expectations, HVS said it anticipated an uptick in financial performance by mid-2002.

Bear Stearns lodging industry analyst Jason Ader expressed caution in light of the sluggish business demand expectations he was seeing for the first half of the year. "Soft group demand and light transient business demand will continue to keep the pressure on rates," Ader said. He added that business travel won't pick up until corporate profit growth strengthens. "However, even then we expect most companies to exhibit some prudence toward increasing their travel budgets, which will retard any rebound to some extent," he said.

Hanson expects 2003 to be a rebound year for the industry. "By 2003, demand growth will increase amid supply growth of only 0.8 percent, allowing occupancy to increase to 60.8 percent," he said. Room revenues similarly, are projected to grow 5.1 percent in 2003. "We expect the recovery to be fairly strong and robust."