Lower Hotel Revenues On The Horizon: Report

With new room supply ramping up against a backdrop of economic malaise, booming hotel revenues are likely to weaken through the end of 2008 based on a new report.

Yesterday, PKF Hospitality Research updated its 2007 and 2008 hotel forecast. The Atlanta-based consulting firm projects that annual RevPAR (revenue per available room) growth will drop from 5.5% this year to 4.2% in 2008 as a host of market forces bring soaring industry profits back down towards earth.

“Compared to the last three years when RevPAR grew at an average annual rate of 8%, the 5.5% and 4.2% forecast growth rates are somewhat disappointing,” says Mark Woodworth, president of PKF Hospitality Research.

Woodworth notes that the 1989 to 2006 long-term average annual growth rate for RevPAR was 3.1%, based on data from Smith Travel Research. By that measure, which takes some of the sting out of this forecast, both of the 2007 and 2008 RevPAR forecasts are “above average” despite an anticipated year-over-year decline.

Another slightly encouraging note: Occupancy should tick upwards marginally through the end of 2008. PKF projects that national hotel occupancy will end the year at 63.4%, or 0.1% higher than year-end 2006. One reason why occupancy will not increase between the end of 2007 and 2008 is that new supply will continue to bring fresh hotels into the market. PKF is calling for a 3.5% increase in the total number of hotel rooms during 2008, up from a 2.1% increase in 2007.

“The majority of the development activity is occurring in the upscale and midscale without food and beverage segments,” says Woodworth, adding that this segment is ironically expected to achieve the highest RevPAR gain of 6.5% this year.

Supply surges typically mute RevPAR growth within the hottest development segments because added inventory dilutes room demand. But Woodworth says that the two chain segments expected to post the lowest RevPAR growth will also see their inventory diminish or increase slightly this year. Midscale hotels with food and beverage are forecast to generate RevPAR of just 2.2% in 2007, followed by the economy segment where RevPAR growth should register 3.3% for 2007.

“Given the turbulent economic environment, U.S. hotel owners and operators should welcome a forecast of modest and steady upward growth in revenues and profits for the next few years,” says Woodworth.

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