Hotel Lawyer | Latest data points to the future: What's in store? | By Jim Butler

My quick "take-away" summary? Last year was a very good year (5.5% RevPAR growth). This year will be good (4.5% RevPAR growth), all things considered, but it will better for some (luxury, mid segment without F&B, top 25 markets) than others, and there are warning clouds on the horizon.

The ALIS Conference

I am usually in back-to-back meetings through most of the hotel conferences, but I always try to hear Mark Lomanno of Smith Travel and the other industry gurus when they present the latest data and their reading of what it portends. Somehow, I feel better prepared to face the uncertainties of the coming months when I know some of the key data points.

Here are some of the highlights of what Mark Lomanno had to say:

SUPPLY AND DEMAND

Here is the supply and demand picture. Although many seem more concerned today than they were a few months ago, the hospitality industry was actually in a worse spot 6 months ago than now.

People talk about the year 2007 as being "the year of two halves"- the first half and the second half. They were so different, they did not seem to belong in the same year.

Supply. Over the last 20 years, hotel room supply has grown at an average of 1.9% a year, and right now, room supply is growing at 1.4% (up from .2% in 2006) so it is still below the 20 year average. In prior downturns like 1990-91 and 2000-2002, there was an excess of supply over historic averages. That is not the case today. This bodes well for the industry and distinguishes these times from prior downturns.

Demand. Over the past 20 years demand for hotel rooms has grown at an average annual rate of 1.8%. The demand situation has actually improved from .5% growth in 2006 to 1.2% growth in 2007.

Occupancy. Occupancy is now running about 63.2%, down from 63.7% in June 2006. But this is still a relatively high number. When the industry starts to get into trouble, occupancy usually falls to 62.5% or less, and we are a ways from that.

In case you are wondering, Mark says that declining occupancy does not necessarily imply declining rates. There have been some notable periods of occupancy decline when ADR was maintained or even increased. In fact, there was a 46 month period of decreasing occupancy over which rates went up. (Look at those periods starting in 1993, and again in 1995, as well as 2005.) The ADR growth has slowed down a little recently, but that is not serious.

To summarize 2007 compared to 2006: In 2007, ADR was up 5.9% and RevPAR was up 5.7% from 2006 levels. These ADR and RevPAR growth rates are significantly above historic averages. Supply has popped up a little bit, but demand has also come back a bit. Occupancy continues to deteriorate slightly.

GLOBAL MARKETS

As discussed above, 2007 was a very good year for the U.S. And outside the U.S., global markets generally did very well too. Look at the numbers for Dubai, London and Sydney!

WHO WILL FARE BEST IN COMING MONTHS?

As Mark and his colleagues at Smith Travel Research look at recent data, they see some distinctions emerging in likely future performance for hotels located in the Top 25 markets vs. all other markets, and in the upper upscale and upscale vs. economy segments. In fact, they believe they see things unfolding exactly the opposite way they did in the last downturn of 2000-2001.

What happened before?

The following slides show what happened in the most recent downturn of 2000-2001.

Performance of the Top 25 markets is shown in red. The first chart above shows supply. In 2000-2001, supply is growing faster in Top 25 markets than in all other markets. In 2005, that all started to change, and since 2005, supply has grown less fast in the Top 25 markets. In fact, rooms have actually come out of the market, and in 2006 the supply growth index for the Top 25 markets fell below all other markets. In the second chart above, you can see how demand started falling off faster for the Top 25 in early 2001.

Also notice how pricing got sluggish for the Top 25 markets in 2000. This was a business-corporate related downturn with leisure remaining strong. But nonetheless, it eroded the price premium previously enjoyed in the Top 25 markets and this negative differential continued to widen in 2001.

But the situation looks different now.

But as we look at 2006, we see that although the demand index for the Top 25 markets has been relatively flat (i.e. slowed down faster than the rest of the country), but with little supply growth, the ADR index for the Top 25 markets has been pulling away strongly from all other markets and from the CPI index. This bodes well for the Top 25 markets in coming months, and suggests that they will outperform all other markets, whether we have good times or more challenges.

If there is a recession (there does NOT have to be), this suggests that it could have a "bottom up" effect on the hotel industry. In other words an economic downturn would have the strongest impact on the secondary and tertiary markets, with the Top 25 markets being least affected and likely to outperform the others.

The Chain scale numbers suggest the same thing. The upper market segments (upper upscale and upscale) outperforming the lower economy segment -- again suggesting a "bottom up" rather than a "top down" vulnerability to recession.

PROJECTIONS & OUTLOOK

Pipeline

The chart below shows how the supply pipeline continues to kick up. It shows about 211,000 new hotel rooms in construction. Based on historic performance, Smith Travel believes that less than 70% of those rooms will actually open as hotel rooms. In other words, hotel room supply will increase, but not as much as the pipeline numbers suggest.

Supply, Demand and Occupancy

So this is how Smith Travel sums up where we have been and where we are going in terms of supply, demand and occupancy:

And when you put it all together, it shows that last year we enjoyed a 5.7% increase in RevPAR, down from the prior 3 record-breaking years, but nonetheless substantially above the 20 year average of 3.4% RevPAR growth. And compared to the 20 year average, next year's projected 4.4% looks pretty good -- just not quite as good as the last few years.

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $40 billion of hotel transactions and more than 100 hotel mixed-used deals in the last 5 years alone. Who's your hotel lawyer?