PKF study: "light is on" for investors in U.S. hotels

In its 59th annual tome on the nation's hotel industry, PKF Consulting, San Francisco, affirms the dynamics behind the resurgent U.S. hotel industry, once again calling upon its experts in the hospitality field to provide a comprehensive overview of the business in Trends in the Hotel Industry -- USA edition.

"When we looked at the hotel industry last year at this time, we said that the future `was beginning to brighten.' Over the past 12 months, the U.S. economy has, indeed, strengthened, and the light for hotels has been shining all year long," says Patrick Quek, president and CEO of Pannell Kerr Foster.

Growth has become a constant state of industry affairs, and nowhere is that better illustrated than on the cover of the PKF study. Both the Philadelphia Marriott (convention center) and the Hampton Inn & Suites in Newport News, Va., are examples of major new from-the-ground-up developments, which is something the industry hasn't seen in earnest in many a long year.

"After watching the hotel industry suffer through nearly a decade of overbuilding, it may seem strange for Trends to feature a rebirth of development (on the Trends cover). However, as the economy continues to improve, we'd like to think that the industry has learned enough to get back to focusing on actual market needs and to avoid shooting itself in the foot again."

"... with all the success the industry experienced in 1994 it will be hard to match the same high levels of growth in the years to come. While PKF Consulting projects further increase m occupancy, the magnitude of the growth is expected to decline as we approach maximum occupancy levels in several market areas. On the pricing side, average daily room rates are projected to exceed inflation in most markets for a third consecutive year," according to the report.

Occupancy: For 1995 will have grown 1.9% over 1994, and will continue to grow at a 1.4% rate through 1996.

Average Room Rates: Annual growth of 4.4% for 1995 and 3.4% for 1996.

Profits: Should continue to grow. Based on the 1995 edition of Trends, the average U.S. hotel achieved a staggering 14.7% increase in operational profitability during 1994. But the annual rate of growth is likely to be less than 10% for 1995 and 1996.

Regional Growth: The rise in lodging performance was led by the hotels in the South Atlantic region, which rebounded from first quarter growth rates of 2.4% for occupancy and a negative 0.4% for average room rates. By the end of the second quarter, these same hotels were enjoying growth rates of 4.5% and 7.3%, respectively, for occupancy and average daily rates (ADR).

Of the 61 major cities PKF covers,42 are forecasted to achieve occupancies in excess of 70% in 1996.

Rooms Supply: Overall rooms supply is projected to be only 1.6% greater than in 1995.

Lodging Demand: Should grow at a 3% pace during 1996. "With all this good news, U.S. hoteliers are no longer dead, just grateful," says the report.

PKF also breaks down the market by product segment: Full,service hotels have finally begun to enjoy the fruits of the industry recovery. In 1994, they achieved the highest growth in ADR among all property types, which translated directly to a 19.6% increase in operational profitability.

Development, however, has been slow. The low $78.53 average room rate and 2 0 . 7 % profit margin still don't justify new construction. The upside for purchasers, though, is promising. Sales, refurbishment, conversion and re-positioning will continue.

Limited-service hotels have reached a maturity in their business life cycle. An industry low 3.6% increase in average room rates brought total revenue down to only 3.6% growth. Still, they achieve the highest profit margins in the industry, and with Revpar averaging $5,194, operation can cover development costs in selected markets. The vast majority of new hotels being constructed are limited-service properties of fewer than 125 rooms, located in rural, highway and suburban markets and affiliated with one of the major national brands.

Resort hotels met with mixed success in 1994. They achieve the highest ADRs, but also the lowest occupancy levels. That is a shift back to the traditional operating strategy for resort properties prior to the recession, and led to a 14.6% profit increase in 1994.

Demand for suite hotels is running at all-time high. They achieved the highest occupancy level of any type of hotel, and ADRs grew at a healthy 4.9% in 1994. Profit margins soared to 32.7% due to premium pricing and limited food and beverage service. Profits are averaging $9,798 per suite, ranking them as the second most-preferred hotel type for development behind limited-service. And new product types, including "no frills" residential suite hotels and integrating suite units with traditional limited service hotels, offer consumers a range of new choices.

Convention hotels are seeing increased performance thanks to continued improvement in the meetings and conventions business. Occupancy improved 4.3% in 1994, the greatest increase of all property types. Average room rates rose 3.7% and revenues grew 15.5% . They also achieved the highest levels of both revenues and profits. The challenge ahead is to incorporate the latest technologies into their operations while still providing the high level of personal service that reminds attendees why they left the office for the hotel in the first place. Later this month, January 24 - 26, PKF and UCLA Extension are putting on the 11th annual Hotel Industry Investment Conference at the Beverly Hilton in Beverly Hills, Calif. If recent hotel conference attendance is any indication, it will be a packed house.

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