There was plenty of good news for the U.S. lodging industry to celebrate the end of 2011. Room-supply growth continued to drift downward while room demand reached record levels during the year. Room occupancy moved back above 60% and room rates moved back above US$100. While both of these measures still are short of the levels reached in 2007 and 2008, it was encouraging to see the industry stage a solid rebound during a period of considerable economic difficulties.
For the year, room supply grew by only 0.6%, falling back to the growth levels of 2006, which was the end of the last construction cycle. That construction cycle lasted only about five years, while the previous cycle lasted over a decade. As we enter 2012, room supply barely is keeping pace with room closures, and it could be the beginning of 2013 before we start seeing significant growth in room supply.
With occupancies and room rates improving, this is somewhat unusual. Normally room supply would start growing at this point in a recovery, but with the continuing turmoil in the financial markets, there does not appear to be much of an appetite on the part of lenders or developers to move up the construction pipeline. At this time, we are forecasting a modest increase in room supply for 2012 of 0.8%, which should not impact occupancy significantly.
Growth in room demand was perhaps the biggest surprise of 2011. While most everyone expected room demand to grow during 2011, I do not believe anyone anticipated an increase of 5% during the year. (Our original forecast for 2011 was for a 3.2% increase in room demand.) Prior to 2011, room demand on a seasonally adjusted basis, had reached a peak of 87.1 million room nights sold in November 2005. The industry finally broke that record in May 2011 and continued to set new monthly records up until September 2011 when it sold 89.6 million room nights for the month. Since then, room demand has stabilized around the 89-million level, which does cause some concern as we enter 2012.
There are a number of issues that will confront the industry and the overall economy during 2012 and given how well the industry did during 2011, we believe it will be difficult for the industry to show significant growth over last year. We are currently forecasting room demand to grow about 1.3% during 2012.
Occupancy on the rise
With low supply growth combined with high demand growth, room occupancy also showed considerable improvement during the year. On a seasonally adjusted basis, we entered the year with occupancy at 57.9% in January and by December, it had climbed to 60.5%. While most of this improvement happened during the first part of last year, the industry was able to maintain occupancies at a level that has not been achieved since early 2008. Our current forecast for occupancy for 2012 is a modest improvement to 60.4% for a growth rate of only 0.5% over 2011.
Interestingly, there are comments floating around that the industry needs occupancy to be above 60% to develop some control over pricing. I am not sure if that is the magic number or not, but the industry reached that level on a seasonally adjusted basis in May 2011, and while room rates initially rose rapidly during 2011, the growth rate in ADR also slowed during the fourth quarter of the year.
Perhaps the most surprising aspect of 2011 for the U.S. lodging industry was a break in the long-term relationship between room rates and occupancy. Since 1987, the year STR began collecting industry data, room-rate increases always exceed occupancy increases. That did not happen in 2010 or in 2011. Last year, occupancy rose by 4.4% while room rates rose by 3.7% while in 2010, occupancy rose 5.5% and room rate remained flat, with no change. That break in the long-term trend line highlights what I believe to be one of the key issues confronting the industry—what has happened to pricing integrity.
Sluggish rebound for rates
When this recession hit, room rates fell much more than we originally anticipated, and they have been much more sluggish in rebounding than is the historical norm. A fundamental change in pricing occurred over the past few years and while there are a number of variables involved, it is incumbent upon revenue managers to assess these changes and respond accordingly. There is little doubt that the relationship between changes in occupancy and room rates will revert to the historical norm during 2012 (with only modest increases expected in occupancy and another 3.8% increase expected in room rates), the primary concern at this point is the ground that has been lost. After adjusting for inflation, it may take another three to four years before room rates climb back to the levels reached in 2008.
Revenue per available room rose an impressive 8.2% during 2011. I continue to be surprised by the pundits that write about the current state of the industry. There are analysts that are always negative and preaching about constant doom and gloom (hey, you missed out on a great rebound in the hotel industry) and then there are those with rose-colored glasses that are always positive (think developers). And then there are those that are convinced that wherever the current trend is headed, the industry will keep going that way.
Fine tuning the forecast
The surprisingly strong performance of the U.S. hotel industry during 2011 should leave a lot of people questioning their own crystal balls. At STR, we worked throughout 2011 to re-evaluate our approach to forecasting the industry and have teamed with Tourism Economics to provide a more in-depth econometric analysis of the industry, the major segments and the top markets. We will continue to fine-tune our forecast methodology as the industry and the economy move through the current economic cycle.
Obviously we cannot anticipate some of the events that will affect the industry during 2012, either their timing or their severity, but we are confident that through the process of developing and creating our forecasts, we will continue to gain a greater understanding of the variables that impact our industry. With modest gains in occupancy and stronger increases in room rates, we expect RevPAR to increase about 4.3% during 2012. Since most of this improvement comes from the rate side, there should be considerable improvements in operating margins for the industry this year.