Another 2000?

Dare we say it? 2005, or perhaps 2006, may be the new 2000, the year nearly everyone in the lodging industry acknowledges as the best ever. A review of formal forecasts, anecdotal evidence and conversations with industry leaders points to a banner year for most properties in most segments and most markets.

“While we still worry about those things we can't see or control, all of the economic indicators that correlate to the lodging business point in a positive direction,” says Jim Holthouser of Homewood Suites by Hilton. “Margins are somewhat of a concern, however. Even though we've seen decent rate growth, things like insurance and other costs are also increasing.”

Choice Hotels chief Chuck Ledsinger agrees that the industry will build on the momentum it generated in '04. “Like much of the industry, we expect to see higher demand, with higher occupancy and rates, along with moderate supply growth.”

There are many signs that point to a good year ahead:

  • According to a forecast from the Hospitality Research Group of PKF Consulting, occupancy, rates and RevPAR in the top 50 U.S. lodging markets will rise substantially this year (see chart on pg. 40). PricewaterhouseCoopers (PwC) says overall industry occupancy will be 62.9 percent in '05, up from 61.1 percent last year.

  • Profits, the stuff you take to the bank, will be $20.8 billion for the industry this year and $25.2 billion in '06, according to PwC. Next year's profitability will top the industry's previous high-water mark of $22.5 billion in 2000.

  • Las Vegas, a bellwether hotel market, is back. According to a Merrill Lynch research report, first-quarter room rates for the city will rise 12 percent during the week and 27 percent on weekends. In January, Sin City hosted 17 conventions with 5,000 or more attendees each. In January '04, it had 10 such meetings.

  • The Manhattan hotel market is also red hot: PKF Consulting forecasts an 84-percent occupancy and a $237 average rate this year. Manhattan's lodging industry will be sold out an impresssive 200 nights this year.

  • Food and drink sales in lodging properties will top $25 billion this year, says the National Restaurant Association, up 5.4 percent over last year.

  • According to a Yesawich, Pepperdine, Brown & Russell study, 19 percent of meeting planners say they plan to book more off-site meetings this year than they did in '04. Orlando is rated as the top site for corporate meetings, while San Diego is the preferred destination for association meeting planners. Bad news: corporate meeting planners say they will shorten the length of their meetings.

  • After falling for several years, international arrivals to the U.S. rose 7.5 percent (to 43 million) last year and will increase by about five percent (to 46 million) in '05, says the Travel Industry Association of America. The numbers are still below the record high of 51 million arrivals in 2000.

  • After two slow years for hotel construction, supply growth will accelerate in '05, says USB. Led by a huge jump in suburban upscale hotel openings (see chart on pg. 38), net hotel supply will increase by 1.7 percent this year. Brands such as Courtyard by Marriott, Hilton Garden Inn and Residence Inn lead the new construction parade.

“I like to think the glass is half full,” says Charles Peck, president and COO of Destination Hotels & Resorts. “2005 will probably be better than a good year but not as good as a blows-the-door-off year like 2000.”

Peck believes some markets, like those in Silicon Valley, will still struggle because the industries that support them, i.e., high tech, haven't fully rebounded. “The conference business has also been slow to recover,” he says, “as businesses aren't yet back on the bandwagon for extensive meetings.”

As in all business environments, improvements in the hotel market won't be even across all segments. As Mark Woodworth of PKF Consulting points out, “Full-service hotels are about four or five quarters ahead of limited-service properties in terms of operating performance.” In '04, full-service hotels posted RevPAR increases of 9.3 percent versus 8.3 percent for limited-service properties. This year, limited-service hotels will outperform full-service in both occupancy and RevPAR gains.

Even so, says Jennifer Ziegler of Holiday Inn Express, the limited-service segment has grown steadily for the past 10 years, even during the industry's recent downturn. “Of course, while leisure guests are our core customers, we've also seen an increasing number of business travelers moving to our segment because it delivers the basics to them at value prices.”

Smart hotel companies and executives will make their own good fortune in ‘05. Steve Rudnitsky of Cendant Hotel Group projects strong RevPAR growth this year partly due to improved market conditions but also because of “our TripRewards loyalty program, our initiative to double field support staff, a new quality assurance program, aggressive targeting of substandard hotels and other key initiatives.”

While rising operating costs worry hoteliers, so does the ability to keep and attract good employees. “As the economy improves and the supply of hotels increases, turnover becomes one of our biggest challenges,” says Holthouser of Homewood Suites. “How to hang on to our best people is a big concern.”

Patrick Logue, director of sales and marketing for Congress Hall and The Virginia Hotel in Cape May, NJ, concurs: “A major challenge for us is the recruitment and development of middle management. Our location affords us an abundance of hourly workers from eastern Europe, but there is a need for direction from qualified managers.”

THE BIG IDEAS

Challenges For the New Year

The International Society of Hospitality Consultants recently compiled its list of issues and challenges facing the global hospitality industry in 2005:

Global uncertainty

While terror attacks are the most direct example of global uncertainty, there are other concerns, including geopolitical relations, governmental travel restrictions and currency exchange rates.

Human resource issues

As the industry continues to recover, it needs to focus on its employees and their roles as service providers. Increased demand requires increased staffing levels at a time when the labor pool is shrinking. The industry must work with the unions as allies, devote more time and money to recruitment and training and educate politicians on the impact of economic and immigration policy on it.

Branding issues.

  • A proliferation of brands and branded hotels worldwide is leading to the commoditization of hotel product.

  • Increased brand competition is leading to amenity creep and diverging interests between owners and brands.

  • Instilling authenticity of local culture into brand standards remains a challenge.

Financial viability

While investors are betting on a strong recovery, in some cases they're not performing realistic projections and investment analyses. Should expectations not materialize, sub-par returns could damage the overall financial credibility of the lodging industry.

Technology

The industry must align technology investment with business objectives, address aging and inadequate infrastructure and learn to better use technology in guest marketing, employee training, yield management, and to meet customer requirements.

Customer issues.

  • The Internet, homogenization of the hotel product and increased corporate oversight have reduced the amount of control operators have over their customers.

  • Hotel customers are changing due to demographics (the aging of the baby boomer generation) and lower transportation costs.

  • Customer expectations are changing as consumers become more sophisticated and better-educated.

Operating cost creep

The industry's bottom-line performance has eroded dramatically since 2000 due to escalating costs, especially non-controllable costs like utilities and insurance but also interest rates, payroll, brand requirements and amenity creep.

Supply issues.

  • There is an increasing supply of alternative forms of lodging: timeshare, fractional ownership, second homes, camping, cruising and waterparks.

  • Under-demolished (functionally obsolete) supply is and will remain a challenge for owners and operators.

  • In the U.S., the use of public funds to develop hotels and resorts presents a challenge for existing private owners and operators.

Safety and security

The threat of terrorist attack remains a major concern for the industry.

Distribution channel management

In 2005, price sensitivity will continue to drive consumer buying behavior in virtually every segment. Pricing structures will need to demonstrate price integrity across all distribution channels — not just electronic ones. The potential challenges are formidable: lead times to booking continue to shrink; the move toward real-time inventory becomes paramount, affecting technology, product categories, segments and channels; and the desire to track and manage every revenue stream in every channel means distribution channel management transitions to a focus on the most profitable customer.

Airlines in the 21st century

It is important to closely monitor the fundamental changes occurring in the airline industry and their potential impact on the hotel industry. The viability of the hotel industry depends greatly on airline lift capacity, service and convenience in travel as well as the cost of airline travel.

For more information, contact Lori Raleigh (lraleighishc@aol.com) or Matt Arrants (marrants@pinnacle-advisory.com) of Pinnacle Realty Investments.

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