Why hotels are not recovering any time soon

January 19, 2010 | Internet Marketing

If your measure of recovery is "the point at which things stop getting much worse," then the hotel industry may well be in recovery. However, the industry will not regain strength until 2012 and will not "recover" to previous peak levels until well beyond, according to PhoCusWright.

Hotel industry performance is often predictable yet somehow still catches us by surprise. Like any other economy, the sector relies on a balance of supply and demand - do not let the flat panel TVs and fantastic beds fool you. Hotel performance is significantly tied to the overall economy as well as the industry’s own cyclical trends. Recovery is a vague concept but one that is easy to evaluate. Here is the PhoCusWright Financial Edition’s outlook for the hotel industry.

DEMAND
It won’t be a surprise to anyone that demand is down sharply. In fact, demand is down more than was seen in the 1990-91 and post-9/11 recessions. Demand declined 5.5-6% in 2010 and that compares to declines of 2% in 2002 and 1% in 1991. For 2010, demand is projected to be up 1-1.5%., with growth in 2011 of 5% and 3-4% growth in the next couple of years. However pleasant those demand growth numbers sound, they still do not add up to an increase in demand over 2007 levels through at least 2011.

SUPPLY
Demand is down, and to make matters worse, new hotel supply is still opening up. The number of new rooms being added rivals historical supply peaks. This happens because hotels take a long time to build and open and because the industry tends to overbuild in good times. Supply growth came in at 3% in 2009. However, as funding dried up over the last year, so too has development activity. The net result will be decelerating supply growth, likely falling to less than 1% from 2011-2013.

OCCUPANCY
Occupancy has fallen from above 63% in 2006 to around 55% in 2009. As demand eventually improves with GDP, and supply growth slows, occupancy will recover. Unfortunately this will take several years to play out. Occupancy should not get back to 60% until 2012—that is the level at which the industry typically enjoys pricing power.

RATES
Weak demand and occupancy lead to lower nightly rates at hotels. Why average daily rates drop so quickly is a different story. The “gas station pricing model” followed by some hoteliers has led to a “race to the bottom” effect on rates. Rates fell by almost 9% in 2009 and will continue to fall until they swing upward in 2011. However, it will take even longer than that for rates to catch up to previous peak-levels. The ability of the industry to hold or increase rates is one of the greatest factors leading to recovery.

REVENUE
Lower occupancy and lower rates have severely impacted revenue per available room. RevPAR fell approximately 17% in 2009 and will not halt its decline until 2011. Again, it will take much longer for revenues to return to peak levels; 2012 RevPAR will be only 90-95% of the 2007 peak. In the meantime, hotel companies are quite skilled at trimming costs to make it through lean times.

RECOVERY
Though brand value has been highly diluted, pricing power should begin to return to the industry by 2012 based on a return to 60% industry occupancy. Occupancy and ADR recovery are four years away. If your measure of recovery is “the point at which things stop getting much worse,” then the sector may well be in recovery. However, the hotel industry will not regain strength until 2012 and will not “recover” to previous peak levels until well beyond.