Pricewaterhouse Coopers U.S.’s updated lodging forecast expects the focus to shift from demand growth to average daily rate gains, as pricing power returns against the backdrop of an earlier-than-expected lodging recovery. Recent performance in the lodging sector has run ahead of expectations. Solid lodging results in the third quarter and the strengthening outlook for the fourth quarter have more than offset slightly weaker near-term expectations for the economy…
Pricewaterhouse Coopers U.S.’s updated lodging forecast expects the focus to shift from demand growth to average daily rate gains, as pricing power returns against the backdrop of an earlier-than-expected lodging recovery.
Recent performance in the lodging sector has run ahead of expectations. Solid lodging results in the third quarter and the strengthening outlook for the fourth quarter have more than offset slightly weaker near-term expectations for the economy. As a result, our current lodging forecast anticipates stronger occupancy and ADR gains in 2011 than our previous outlook.
Despite a slower pace of economic recovery in 2010, lodging demand has remained brisk. Lodging results for September and October show levels of occupied rooms that are consistent with average demand during 2007, showing lodging demand has made a substantial recovery from earlier lows. Lodging demand fell further and more rapidly than the overall economy during the onset of the recession, but the sharp pullback in travel proved temporary. After reaching a trough at a similar time as the overall economy in mid-2009, lodging demand has rebounded more quickly and average demand levels in 2010 are estimated to be only 1.1 percent behind the average during 2007.
However, the recovery in lodging demand is only part of the story. Since 2007, 3,300 new hotels have opened, and we estimate that room inventory in 2010 will average 7.7 percent ahead of 2007 levels. Occupancy rates in 2010 are 8.2 percent below 2007 levels, and average daily rates are 6.0 percent below, resulting in RevPAR 13.7 percent below 2007 highs.
Recent occupancy gains are important to the industry, but in the near term, the focus is turning to the potential for increases in ADR. In many markets, hotels are beginning to experience higher ADR levels through the return of business travelers and decreased reliance on more price-sensitive booking channels. In 2011, continuation of such shifts in the mix of business, as well as increases in negotiated rates and moderate gains in group demand, are expected to result in higher ADR. Such ADR increases, combined with higher occupancy levels, are expected to result in a 7.4 percent increase in RevPAR, the largest annual gain since the 7.8 percent increase in 2006. Even as fundamentals have improved, construction activity has remained suppressed. Construction starts are running at low levels and the pace of recovery has not substantially altered our expectations for a slow recovery in new hotel construction.
Theodore is the Co-Founder and Managing Editor of TravelDailyNews Media Network; his responsibilities include business development and planning for TravelDailyNews long-term opportunities.
