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Top 25 Hotel Markets Run Into Major Headwinds

A dismal performance for the U.S. economy in the fourth quarter of 2008 led to a weak showing for the nation’s top 25 hotel markets, according to Smith Travel Research, providing further evidence that the recession is taking a toll on the hospitality industry.

The average occupancy rate among the top 25 markets registered 58.7% in the fourth quarter, down from 63.7% in the fourth quarter of 2007, according to the hotel researcher based in Hendersonville, Tenn. Revenue per available room (RevPAR), a closely watched metric that takes into account occupancy and room rates, fell by 10.7% in the top 25 markets during the same period.

The rapidly deteriorating economy has led to an accelerated pace of decline in the hotel sector in recent months. U.S. gross domestic product (GDP) fell at a 3.8% annual rate in the fourth quarter of 2008. Preliminary estimates by the U.S. Department of Labor show non-farm payrolls fell 524,000 in December alone. With job losses mounting in the first few months of 2009, room demand will continue to taper off in the near term, hotel experts predict.

“The top 25 markets are affected more harshly by whatever macro-economic headwinds we’re sailing into,” says Jan Freitag, a spokesman and vice president for Smith Travel.

The number of room nights sold in the top 25 markets fell by 5.1% in the fourth quarter compared with the same period a year earlier, but the number of rooms available rose 2.9% during that stretch.

“That scissor is opening. We have less room demand and more room supply, which is really the underlying fundamental that hurts the hotel industry right now. That leads to a decrease in room rates,” explains Freitag.

Indeed, the average daily rate among the top 25 markets checked in at $132.23 in the fourth quarter, down 3.1% from $136.50 a year earlier.

The Phoenix market, stung by soaring home-foreclosure rates and slumping house prices over the last few years, earned the dubious distinction as the worst performer with an 18.7% drop in RevPAR year-over-year.

But even Washington, D.C., consistently among the strongest performers in the hotel sector due to a strong local economy buoyed by government jobs and tourism, isn’t immune to the laws of supply and demand.

While total room nights sold was virtually unchanged year-over-year in the Washington, D.C. market, the available number of rooms rose 4.1%. That imbalance caused RevPAR to drop 4.4% in the market during the period.

Smith Travel projects that GDP will nudge into positive territory in the latter half of 2009 and that room demand will turn positive in the fourth quarter. “That’s a bit of a silver lining,” says Freitag.

While many other forecasters are projecting that RevPAR in 2009 will fall 10%, Smith Travel is a little more bullish. The researcher projects revenue will fall 5.9% for the year.

TAGS: Hotel
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