(EDITOR’S NOTE: This is part one of a two-part series forecasting the year ahead in lodging. This story focuses on the operating side of the industry, while Monday’s will cover the real estate side.)

Vantage Hospitality President & CEO Roger Bloss was watching sports on TV last month when he discovered what might be the perfect metaphor for the hotel industry outlook in 2012. “Instead of football, I was watching a road rally and noticed that sport is a lot like what’s facing the economy and our business,” says Bloss. “While at the start everyone is optimistic and racing to get out to the front, we’re all facing a lot of bumps in the road. It’s how we handle those bumps that will determine who succeeds and who fails this year.”

Indeed, nearly every industry analyst, owner, chain president, management company executive and manager believes 2012 will be a continuation of 2011 in terms of encouraging operating performance. Last year, according to STR projections, was positive in all three key areas of hotel performance. Occupancy was forecast to rise 4.0% to 59.9%, just under the 60% mark that is perceived as the line between a healthy and unhealthy industry.

Average rates were forecast to be up 3.6%, and RevPAR was expected to rise by a healthy 7.7%. The best news in 2011 was the very favorable balance of hotel demand (up 4.7%) and new supply (up slightly at 0.7%).

Next year’s forecasts are for more positive news, but each analyst or company has a slightly different outlook for the industry in 2012:

• In mid-November, STR downgraded its 2012 forecast from earlier predictions. In revising its numbers, STR President Amanda Hite cited two factors: recognition that the industry’s success in 2011 makes for more difficult comparisons and concerns over “the lack of growth in overall macro-economic indicators.”

While STR forecasts slight increases in hotel demand (1.1%) and occupancy (up 0.2% to the 60% mark), rates should continue to climb slowly (up 3.7%, not as robust as the industry experienced in the early years of the last decade but still above the 20-year average increase of 2.8%). The result will be a 3.9% hike in RevPAR, down from the previous two years but above the 20-year average of 2.4%. Again in 2012, new hotel supply will increase by less than 1%.

• Even though PKF Hospitality Research also revised its initial 2012 forecast downward, the firm is slightly more bullish than STR. While the projections reflect what PKF-HR President Mark Woodworth calls a “surprise in the pace and magnitude of the surge of hotel demand,” the firm also cautions that results will continue to vary by market and segment.

PKF-HR says occupancies will increase by 1.3% to 60.8%, while rates climb by 4.7%, yielding a 6.1% rise in RevPAR, down from its initial forecast of a 7.1% hike in RevPAR.

“We’ve consistently said 2012 will be another good year for the hotel industry, even though uncertainty in the marketplace continues to exist, and it could be argued the uncertainty is pervasive,” says Woodworth. However, he believes the prospect of rising room rates will actually spur some consumers to travel. To make his point, he compares travel to the home buying process.

“Travelers, both groups and individuals, see lodging prices going up so they figure if I’m going to make a trip—either for business or leisure—I should take advantage of the relatively lower prices today than what they might be later in the year or beyond,” he says. “On the other hand, some consumers who may be able to buy a home see mortgage rates aren’t going up and home prices aren’t going up so there’s no reason to buy right now, no urgency.”

Digging into PKF-HR’s numbers shows the unevenness of the hotel industry recovery. Of the 50 markets PKF-HR covers in its Hotel Horizons forecast reports, 41 are already renting more rooms now than at any time in history. But the demand recovery varies widely by segment: in 49 of the 50 markets, upper-tier hotels have passed their previous peak levels of demand, while lower-tier hotels have reached the same milestone in only 16 cities.

•TravelClick, the reservations and business intelligence firm, approaches industry forecasting from another angle: Its North American Hospitality Review collects reservation and committed group sales data from participating hotel companies to create a snapshot view of future business for the industry.

TravelClick’s latest report, which covers the 12 months from last December through November 2012, calls for a 3% increase in occupancy, a 3.6% bump in average rate and a 5.3% hike in RevPAR. The company is particularly bullish about the first quarter of 2012, with strong transient demand—both business and leisure guests—driving a 6.6% gain in RevPAR. January and March will be the key months in the quarter, says TravelClick, with RevPAR increases of 8.4% expected in January and 9.2% in March.

• The hotel market in Canada hasn’t experienced as many highs and lows as in the U.S. According to Carrie Russell, senior vice president of HVS in Canada, the market was relatively flat in 2011 and should be the same in 2012. She forecasts a 5% rise in RevPAR this year.

The winter Olympics in 2010 was a boon to Vancouver, which saw RevPARs rise 19% that year. Last year, due to the opening of a new convention center, an increase in cruise ship arrivals and a perceived “Olympic afterglow,” rates and RevPAR in the market fell only slightly.

Like the U.S., Canada has some hot markets and a few ones experiencing difficulties. According to Russell, the energy business in Alberta has lifted RevPARs in that province up 10-12% through most of 2011. Markets showing RevPAR slides include Halifax, Windsor and northern Ontario.

THE VIEW ON THE GROUND
While the industry analysts have their predictions, it’s useful to talk to brand executives, owners and operators to get their sense of the market in the coming year. Fred Cerrone, the veteran President & CEO of Atlanta-based Hotel Equities, sees a 5-7% rise in RevPAR for his firm’s 42 managed properties. That follows a nearly 7% increase in 2011.

The company’s 2011 results could have been better but about a third of Hotel Equities’ portfolio is in the Atlanta market, which Cerrone says is suffering from a “triple whammy.”

“The convention business is not doing well for us,” he says. “The number of events in town is down, as is average attendance. And, the length of stay by the typical attendee was shorter last year. That affects the leisure segment of our business because in better times convention attendees tend to stay a few extra days to experience the city.”

While Cerrone is cautious for this year, he’s especially bullish on 2013. “It should be a terrific year because there is a lot of pent-up demand sitting on the sidelines. When the dam breaks and companies start hiring again and consumer confidence returns, we should see a major bump in our business.”

Tom Conran, another management company veteran, believes 2012 will be a year of improvement but he worries about rate. He’s forecasting a 4.5-5% jump in RevPAR for the properties his firm operates, with about three percentage points of the improvement coming from rate.

“Rates are creeping up but not as fast as occupancy is improving,” says Conran, who is principal of Denver-based Greenwood Hospitality Group, which operates nine mostly-upscale full-service properties. “A lot of our hotels have lineage accounts. In 2010 and part of ’11, we had to retract our rates to retain these long-time customers, so now it’s hard to ask them for 6% or 7% rate increases.”

Another challenge Conran and many operators face is the increasingly shorter booking windows, which he sees in both group and transient business.

“This phenomenon puts a whole new emphasis on revenue management in our properties,” says Conran. “It’s important we manage our outcomes, not have the outcomes manage us. Going forward, we’ll need to have more data to be more strategic.”

The luxury side of the business is somewhat schizophrenic, notes Laurence Geller, CEO of Strategic Hotels & Resorts, operators of 17 upscale and luxury hotels and resorts. While he sees caution among groups, “our leisure customers are still traveling and spending more.”

Demographics are the friend of properties like those run by Strategic. As Geller points out, “Only 4% of college graduates are unemployed and that drops to 2% for those people with post-graduate degrees. These are my customers.

“They’re comfortable knowing they’ll keep their jobs and while they’re not going for overt, conspicuous consumption, they’re still enjoying a luxury lifestyle and seeking experiential consumption.”

This trend is also holding in the middle of the market, at least according to Choice Hotels President Steve Joyce. While he says the franchise company is planning on a moderately positive year, “I’m not sure it won’t be stronger than everyone is projecting.”
Like Geller, Joyce believes people who have jobs are confident they’ll keep them. “Many companies are doing well, balance sheets are strong and it gives people confidence,” he says.

“And on the leisure side, consumers are just tired of sitting home, not taking their vacations. Their attitude is, ‘I’ve got a job and feel comfortable about it. Life must go on,’” says Joyce.

Vantage’s Bloss uses another yardstick—his members’ attitudes and actions—to gain a positive reading for the coming year. “At our annual conference in December, our members were quite optimistic about the year ahead,” he says. “As an indicator of that attitude, the membership passed two measures during the convention that effectively increases their dues. That speaks volumes for their faith in the future of the business.”

CHALLENGES AHEAD
While optimism reigns among many in the hotel industry, everyone agrees both known and unknown challenges could slow down or derail the lodging market’s steady recovery. Potential obstacles cited range from global to local issues. The uncertainty caused by gridlock in Washington is a common theme.

“It would certainly be healthy for our business to have the White House and the rest of government be more supportive of our industry,” says Cerrone of Hotel Equities. “Today, I worry a lot about what government’s going to do to negatively impact my business. I never had to do that before.”

The slow pace of economic recovery is one of the things that worries Joyce. “This May, we will be four years into the downturn and I still don’t see anything that will lead to a broad economic recovery,” he says. Joyce, like other industry leaders, believes next fall’s elections could stabilize the feelings of uncertainty.

As PKF-HR’s Woodworth noted, either outcome in the presidential election should lead to “a measurable change in behavior by most businesses and many consumers. The thought will be at least for the next four years this is what the landscape will look like and I can plan accordingly.”

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