As growing numbers of tourists and business travelers check into hotels, the U.S. lodging occupancy rate is finally expected to reach pre-recession levels this year, according to the March forecast by PKF Hospitality Research, LLC.
Atlanta-based PKF-HR forecasts that hotel managers should be able to become more aggressive in room pricing, with average daily rates (ADR) - a leading driver of hotel net operating income - increasing by just under 5% this year and another 5.7% next year.
Revenue per available room, meanwhile, should increase by 6.6% this year to $73.20 and by another 7% in 2015, continuing a streak in which RevPAR has increased by 5.4%, 6.7% and 8.1%, respectively, in the last three years.
Despite fears from some in the hotel industry about overbuilding, escalating demand over the past two years for the nation's 4.9 million rooms has helped keep occupancies in check, according to PKF-HR President R. Mark Woodworth.
"Anyone who was around in the 1980s and 1990s remembers the dramatic negative impact overdevelopment can have on the lodging industry," Woodworth said. "Fortunately, we see a different scenario evolving during the current property cycle."
According to Smith Travel Research, the long-run average annual change in supply has been 2%. "We do not see the national annual supply growth exceeding that level until 2017," Woodworth added.
Return of Group Travel
Improved demand by group travelers is another key element expected to help sustain RevPAR and drive cash flow growth higher for owners, Fitch Ratings said in a separate report.
Lodging REITs and C-Corps generally reported solid group bookings pace for 2014 ranging from low- to mid- single-digit growth in room night demand. A majority of companies noted an improvement in out-year bookings beyond 2014, suggesting that the bookings window is expanding," said Fitch U.S. REITs Director Stephen Boyd, who headed the report. "We believe this is important, as an expansion in the bookings window suggests large group demand is accelerating."
Up to now, group strength has principally been concentrated in nearer-term bookings by smaller corporate groups, Fitch said.
With ADR driving RevPAR growth the next few years, "we continue to view the current time period as one of the most profitable in the history of the U.S. lodging industry," PKF's Woodworth said.
Actual counts of new rooms entering the market have also remained below history, according to the consulting firm.
"During past expansions, we have seen three to five consecutive years of 100,000 or more net new hotel rooms entering the market. Our current supply forecasts for the next three years are well below that threshold," Woodworth said.
The slower rise room pricing when adjusted for inflation, or "real ADR," should also help keep the brakes on oversupply, noted John B. (Jack) Corgel, PKF-HR adviser and professor of real estate at the Cornell University School of Hotel Administration.
"Because of the discounting that occurred during recession, real ADR is not projected to reach pre-recession levels until beyond 2015, thus suppressing the financial feasibility of new development projects in the near term," Corgel said.
While the relatively slow pace of increase in room rates in recent quarters has muted lodging profits, "the resulting lack of new supply allows for some very favorable forecasts of future performance," Woodworth noted.
Unit-level hotel profits should rise 12.7% in 2014 and another 14.5% in 2015, capping a five-year run of double-digit gains not seen since the 1970s.
PKF-HR predicts the number of accommodated U.S. room nights will increase by 2.6% in both 2014 and 2015, and with demand growth outpacing supply, the occupancy rate will continue to rise through 2015, for a sixth consecutive year of gains.