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Moody’s Changes Stance, Sees Recession, Lower RevPAR Ahead

In light of evidence that the nation’s economic climate is weaker than it had earlier anticipated, Moody’s has revised its projections and is now predicting a recession, based on deteriorating economic fundamentals. Moody’s is also revising its outlook for the hotel industry.

The agency delivered some gloomy news for the lodging industry, saying that revenue per available room, or RevPAR, is likely to increase by a mediocre 3.0% in 2008, rather than by 4.5%, which it predicted in 2007.
Atlanta-based PKF Hospitality Research, which provides data related to the hospitality industry, says that turmoil in the capital markets and the rising price of oil have fueled the decline in economic fundamentals, meaning that a much weaker economy can be expected in the months ahead. is PKF-HR’s primary economic forecasting agency.

In late 2007, estimated 2008 Real Personal Income Growth, a basic measure of lodging industry performance, at 2.6%. Now, however, the company says that growth measure is expected to be 1.6%, and that U.S. hotels are likely to see only modest increases in revenues and profits this year.

“When looking at 2008, we believe that U.S. hotel owners and operators will struggle to grow their revenues and profits, but market conditions will not be as damaging as we saw back in 1991 or 2001,” says Mark Woodworth, president of PKF Hospitality Research, in a statement.
Although growth will continue to be minimal early this year, Woodworth expects that demand for lodging accommodations will rise by 0.9% on an annual basis. While that’s only half the long-term annual average, it still would mean a net gain in room nights for the year, Woodworth says. He predicts that the hotel industry turnaround will come in first quarter 2009.

Meanwhile, the U.S. national average occupancy rate is expected to decline by a point, from 63.2% in 2007 to 62.2% in 2008.
PKF-HR expects room rates to rise 4.7% in 2008. That would beat the projected pace of inflation, 2.7%, and the long-term annual average change in room rates, which stands at 3.5%.

Luxury hotels are expected to incur the largest drop in occupancy, but also the strongest increase in room rates, as business travelers scale down their travel plans and accommodations to fit in with a more conservative corporate approach to business travel.

“Owners are not going to be happy with such listless gains in their bottom line,” says Woodworth, but the current downturn actually looks rosy when compared to what was experienced during the past two economic recessions.”

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