Part of the fun in our jobs as data guys is to have the ability—and maybe the obligation—to dig deep into the data pile, to establish trends and patterns and then to forecast the future. At all major hotel industry conferences someone from STR, the parent company of HotelNewsNow.com, is being asked to stand up and present our version of the crystal ball and to interpret and explain where we see the industry going. Our founder Randy Smith will do so once again at the NYU International Hospitality Industry Investment Conference in June at the New York Marriott Marquis. All of our forecasts are based on our unique database of historic performance results that we gather from the majority of U.S. hotels. We combine this with insights from our partners at Tourism Economics, which is part of the larger macroeconomic forecasting firm Oxford Economics.
Our 2012 Forecast
The continued macroeconomic recovery has resulted in some heady demand increases, and the U.S. lodging industry is poised to sell more rooms this year than ever before in history—just like it did in 2011. Based on the sound supply and demand fundamentals and nationwide occupancies of more than 60%, we increased our revenue-per-available-room forecast for the year to 5.5%. RevPAR growth for the remainder of the year will be fueled by average-daily-rate increases of approximately 4% and demand increases of approximately 2%, coupled with negligible supply growth of around 0.5%.
The 2012 Guidance from the major players
Of course, numerous other companies, most prominently amongst them our friends at PKF Hospitality Research, PricewaterhouseCoopers and the major equity analysts, also are forecasting industry performance. They have come up with somewhat more optimistic scenarios. In addition, most of the publicly traded companies gave RevPAR guidance during their first-quarter conference call. Their guidance numbers are for their own universe of hotels and not a forecast for the total U.S. lodging industry. Most lodging analysts keep a sheet such as the following in their top drawer to keep score of the many RevPAR guidance numbers. This also helps them understand larger trends in the sentiment of the publicly traded companies.
Marriott International and Starwood Hotels & Resorts probably have the most widely spread portfolio in terms of price points and therefore often are used as a bellwether for the health of the industry overall. So, given that their guidance is between 6% and 8%, and given that a number of owners published their guidance in this same range, why is the STR number decidedly lower? Asked differently, what explains the difference between the STR forecast and the companies’ guidance? Or, to paraphrase a prominent CEO of a real-estate investment trust: “What are you smoking?”
Let me point to a three-part answer:
1) Our chain-scale forecast tracks guidance.
2) Independents underperform the industry.
3) We do not believe (yet) in meaningful Group ADR growth.
Below is some more background on these three statements:
Our chain-scale forecast tracks guidance
In addition to forecasting the industry, we also produce year-end 2012 RevPAR projections by chain scale. As the following table shows, the RevPAR growth rates range from 7.9% for luxury chains to 4% for the group of non-chain affiliated hotels.
Given that a large number of publicly traded companies have exposure in the upscale and luxury segment, their guidance and our forecast actually line up when you “peel the onion” and look at the chain scales individually.
Independents underperform the industry
It is worth repeating that while the majority of conversations at conferences are focused on the brands, around one-third of all rooms are independent. We track the performance of those hotels separately and over time an interesting pattern emerges:
When looking at the post-9/11 hotel recovery and the depths of the downturn in 2009, the independent hotels underperformed their branded brothers. While during the rebound years of 2002 and 2004 the performance for chains and independents basically moved in lockstep, RevPAR growth for non-branded hotels eventually slowed while it continued to accelerate for branded hotels. During the most recent downturn, independent RevPAR declines were steeper than those for the branded hotels. And while the recovery pattern so far has exhibited a similar trajectory as observed after 9/11, it is probably not unreasonable to argue that, in the upcoming quarters, branded hotels will continue their RevPAR growth faster than their independent counterparts.
We do not (yet) believe in meaningful group ADR growth
Lastly, for the upper end of the market, we collect data that breaks out room demand and ADR for “group” (rooms sold in increments of 10 or more) and “transient” (rooms sold in increments of between 1 and 9). As the following two charts show, the ADR growth for transient and group rooms have been consistent since January 2011, but at a level that we find surprisingly weak.
As can be seen, the ADR growth for transient rooms seem to fluctuate between 3% and 5% for the last 15 months, with the most recent months showing growth around 4%. The good news is transient room rates, with the shorter booking window, can increase meaningfully as midweek and weekend occupancies continue to rise and hoteliers feel that they have pricing power. We expect that to happen throughout this fall and the summer.
Since January 2011, group ADR has been growing at a pace of between 2% and 3%. Unfortunately, this room-group-rate pace was negotiated in 2010 and 2011 based on a position of fear and limited visibility. We are afraid that despite the increases in occupancies and perceived pricing power, group room rate growth will continue to be hampered because group room rates for the fall are already “on the books” and now will be consumed in the coming months and quarters.
Putting these two rate scenarios into a model yields the following outlook for 2012:
I assume transient ADR will grow 5% (not unreasonable given the past performance) and group ADR will have a growth of 3% (maybe aggressive, maybe not, given what was negotiated for this summer and fall). This is based on historic patterns that the revenue mix on the upper end of the market is two-thirds from transient travelers and one-third from group guests. Given those ratios and assuming occupancy growth of approximately 2% (again, not unreasonable given prevailing demand patterns) a reasonable RevPAR forecast for the upper end of the market is more than 6%.
So, what are we ... thinking?
Given the math and observations above, we think that our projections are perfectly reasonable. Our forecast and the publicly available guidance differ in a few key points, but I think we all agree on the prevailing sentiment of demand recovery and ADR increases in 2012 and 2013. The strength of the recovery is obviously cause for debate as not all chain scales will see similar pricing power. But, if the industry outperforms our forecast, we will be the first one to admit that we were not bullish enough. Let’s see what happens.
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