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If you thought 2005 was good for your bottom line, you haven't seen anything yet. No matter how one slices it, 2006 may be the best year ever for the U.S. lodging industry — even better than 2000, which many executives and analysts believed could never be topped.
A number of factors are converging to create an economic climate that should favor most lodging properties in most segments and markets. They include an improving economy, strong business travel, an insatiable consumer appetite for leisure travel and historically low levels of hotel construction. And while the industry faces a few challenges — continued threats of terrorism, higher construction costs and lingering psychological effects of the recent tsunami and hurricanes — there should be few significant obstacles in the way of a better-than-banner year for the hospitality industry.
Let's take a look at the forecasts from a variety of analysts, consultants and hotel companies:
Even though occupancy is probably the least relevant measure of lodging success (it rarely shifts more than one or point in a year), it's often the first one cited in describing the health of the industry. While this year's forecast occupancy (from PricewaterhouseCoopers) of 64.1 percent will be the highest since before Sept. 11, 2001, it's also not that far from the industry's low mark of 59.0 percent set in 2002.
Whereas business travel has slowly rebounded following the post-9/11 lull, leisure travel never went away and has gotten steadily stronger. Two leisure hotbeds — Las Vegas and Hawaii — both posted record years in '05 and should do even better this year.
Hawaii set a record last year with 7.4 million visitors, up by 450,000 over its previous high-water mark (2004) and an increase of more than one million visitors from 2001. This year, visitor counts will rise another three percent.
Las Vegas also set a tourism record last year with nearly 42 million arrivals at McCarran Airport, up about seven percent from '05 and the highest in the airport's 60-year history.
Leisure travel to the U.S. from Canada and Mexico has returned to pre-9/11 levels, even though in 2005 the total number of overseas visitors was 17 percent less than it was in 2000. The Travel Industry Association expects total international visits to top 52 million this year, which would exceed the numbers prior to 9/11.
According to PwC, room rates will jump an average of 5.1 percent this year. The luxury and upper upscale segments will be most aggressive with forecast rate hikes of 7.6 and 6.4 percent, respectively. A still-struggling economy segment will only be able to manage a rate increase of 2.6 percent.
An even more telling example of the industry's pricing power is evident during periods of high demand. During the pre-Christmas season, for example, rooms at even so-called mid-priced hotels in New York City were renting for $500 to $600 a night. At some luxury properties, rates topped $1,000 on many nights.
Likewise, this past New Year's weekend in Las Vegas saw most rates above $350: $400 at the Hard Rock, $500 at Bellagio, $600 at MGM Grand and $700 at the Wynn.
RevPAR is probably the most relevant of all hotel industry yardsticks in that it combines the effects of both occupancy and rate. In October, Smith Travel Research projected that RevPAR would grow in 2005 by 8.2 percent. If that projection holds, it will be the highest full-year increase since the firm began tracking lodging industry data more than 25 years ago.
PwC believes RevPAR will rise a solid 6.8 percent this year and more significantly, three-fourths of the hike will come from higher rates rather than higher occupancies.
Higher demand and higher rates will translate into record industry profits ($25.2 billion) this year, compared to the previous top of $22.5 billion in 2000. Next year, profits will jump another 18 percent to nearly $30 billion, nearly double what it was in 2004.
After a fast start, business travel tailed off in the second half of '05, according to the TIA. Domestic business trips rose by one percent last year and should rise by two percent or more this year, depending on the overall strength of the economy.
One look at operating results at center-city hotels shows the renewed strength of the business travel market. In its weekly industry data reports, Smith Travel Research has consistently shown the highest RevPAR increases at urban and airport locations, with double-digit hikes common for cities such as Houston, Atlanta, Chicago and New York.
The boom in condo conversions has fueled operating improvements for many markets. In Philadelphia, for example, where four center-city hotels were taken off the market and converted to residential condos, occupancy has remained above 70 percent for all of 2005.
Business travelers are bracing themselves for higher prices this year for both airline travel and hotel rooms. An American Express study says short-haul economy airfares in the U.S. will rise by five to eight percent, while corporate hotel rates will increase more moderately: zero to three percent for mid-range properties and two to five percent for upper-scale hotels.
A survey by USB Investments of 200 hotel executives shows more bullish expectations for corporate rates this year. According to the study, negotiated rates will rise by an average of 6.1 percent. The increases will be higher for upscale hotels (7.3 percent) than for luxury properties (5.4 percent), according to the poll.
Some hotel chains also plan to be more aggressive with their negotiated-rate clients. Marriott says it expects corporate room pricing to rise between seven and nine percent. The company said that in 2005, more than half of its group business was booked in prior years at lower prices. This year, it expects this older business to account for just 30-35 percent of group room nights, which will help the chain boost its group rates.
Although hotel construction has moderated substantially from its peak during the late 1990s, new development is on the rise. According to Lodging Econometrics, 778 new properties with 84,458 rooms will open this year. In 2007, openings will top 900 properties and 100,000 rooms, well below the peak year of 1998, when more than 1,500 hotels and 156,000 rooms were added to the supply.
Several factors contribute to the slowdown in hotel construction. The hot residential condo market competes heavily with hotel projects for sites, capital and development expertise. Also, post-Katrina and Rita shortages in construction materials and labor have driven the cost of building in many markets to levels that don't make sense for many lodging projects to proceed.
Despite the challenges, hotel construction is still happening. La Quinta, for example, has earmarked $80 million this year for construction of three new central business district properties, two redevelopment projects and conversions of properties between its La Quinta and Baymont brands. Likewise, from its whopping $456-million capital spending budget this year, Hilton Hotels will spend $195 million on timeshare projects and $175 million on renovations.
Even though some economists talk of an imminent downturn in enthusiasm over real estate as an investment vehicle, a recent Urban Land Institute study suggests otherwise. The report, completed in conjunction with PricewaterhouseCoopers, says while growth will be “more moderated compared to the robust levels of recent months, real estate will hold a value edge over stocks and bonds.“
The report was particularly glowing about the prospects for hotel real estate, calling it the market sector with most potential. Its pick for best bets: resorts and destination cities, especially Boston, San Francisco, Florida and Hawaii.
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