Record occupancy should push pricing power
 
Record occupancy should push pricing power
05 SEPTEMBER 2014 8:58 AM
PKF-HR is forecasting record occupancy levels for the U.S. hotel industry in 2015. Pricing power should follow, sources said. 
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REPORT FROM THE U.S.—Record occupancy projections for 2015 are giving operators the confidence to push rate, sources said. 
 
PKF Hospitality Research on Wednesday released its updated forecast, which called for a 2015 year-end occupancy of 65%—a record for the industry, according to historical data from STR, parent company of Hotel News Now.
 
The previous high was 64.8% in 1995, according to STR. 
 
“Demand is continuing to outperform even our strong estimate of demand this year. … Our model is reacting to that,” said Jamie Lane, senior economist at PKF-HR
 
“We’re expecting occupancy to finish 2014 at 64.4%. That’s not an acceleration of demand; it’s really a continuing of what we’ve seen so far in 2014. We think that number’s going to be very easily attainable. Just a slight increase of occupancy next year (of 0.9%) gets us to record levels.”
 
STR, by comparison, is forecasting occupancy to finish 2015 at 64.2%. 
 
“We’re not as bullish,” said Jan Freitag, the data company’s senior VP of strategic development. 
 
Either projection represents significant growth from the trough of the past recession, during which occupancy sank as low as 43.6% in December 2009. The lowest annualized number also came during 2009, when occupancy finished the year at 54.6%, according to STR. 
 
Demand (should) beget ADR
Sources are confident strong demand numbers will continue to translate into pricing power. 
 
“We think that will translate into pricing power as scarcity really comes into the market,” Lane said. “We’ve started to see those prices and (average daily rates) start to increase quite dramatically in a lot of the markets that have either reached their previous peak occupancy level or are close to.”
 
PKF-HR is forecasting ADR growth of 4.5% by year end and 5.7% during 2015. STR’s forecast calls for rate gains of 4.2% and 4.4% during 2014 and 2015, respectively. 
 
Through the first seven months of the year, ADR is up 4.3% to $114.71, according to STR.
 
“The magic number is 62% for the nation. That’s really when things start clicking,” Freitag said. 
 
Rate growth tends to lag occupancy, however. During 1995 when the U.S. hotel industry set its previous occupancy record, corresponding ADR growth was 4.8%. The following year rate growth was 6.5%. 
 
Strong demand is putting the Hospitality Ventures Management Group team in a stronger position at the negotiation table when finalizing corporate contracts for 2015, said Mary Beth Cutshall, senior VP of acquisitions, business development for HVMG. “We’re able to be more aggressive with those rates for 2015.” HVMG operates 41 hotels comprising more than 7,600 rooms throughout the United States.
 
Robert Habeeb, president and COO of First Hospitality Group, said hoteliers should be able to realize rate gains, although the slightest scare could send revenue managers into a discounting panic. 
 
“In the classical sense, the opportunity should be there over the next year and a half for us to gain significantly on some of the rate we lost leading up to 2007. But the truth of the matter is it’s such a different environment where we’re managing our rates on a minute-by-minute and hour-by-hour basis, that the danger still lurks.”
 
Operators’ occupancy outlook
Operators interviewed for this report agreed the U.S. hotel industry is on track to hit PKF’s more bullish occupancy forecast. 
 
“We’re seeing the same thing in our portfolio,” Cutshall said.  
 
“The historically low number of new supply is definitely helping. Also, it’s the psychological mentality of comfort and security now that we’ve exited the recession and people are feeling better about their position financially. They’re just more apt to go out and make that trip and travel,” Cutshall said.
 
Occupancy increases are widespread across the majority of customer segments, she added. 
 
James Bethany, corporate director of revenue management at Peachtree Hotel Group, is seeing the same thing in his company’s management portfolio of 28 hotels comprising more than 3,000 rooms. 
 
“All this growth is not coming from one particular segment. All segments are up,” he said. And while the 65% project is high, “I think it’s doable,” he added. 
 
Pushing the hotel industry over that hump could be the average length of corporate stays, which is hovering between one-and-a-half to two nights, Bethany said. 
 
“If that lengthens in any way on average, you will for sure see those occupancies go up,” he said. 
 
Habeeb said, “The momentum is clearly there.” A potential hurdle, however, is supply. Markets such as Chicago, which has 2,292 rooms under construction, according to STR, actually could see occupancy dip in 2015, he said. 
 
Sources agreed occupancy growth will play out differently market by market. Some markets—14, to be exact—will set their own occupancy records, according to PKF-HR. These include: Anaheim, California; Charlotte, North Carolina; Denver; Fort Lauderdale, Florida; Houston; Los Angeles; Louisville, Kentucky; Miami; Nashville, Tennessee; New York City; San Diego; San Francisco; Seattle; and Tampa, Florida. 
 
Other markets, by contrast, are still well below their pre-recession peaks. 
 

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