Hotel Building Accelerates; Room Rate Growth Slows

Hotel development activity continues to accelerate while average daily room rate growth decelerates, reported CBRE Hotels, Atlanta.

“On the one hand, we are comforted by the continual growth in accommodated demand. After all, if people stop traveling, nothing else really matters,” said CBRE Hotels Senior Managing Director Mark Woodworth. “On the other hand, there continues to be a disconnect between the record occupancy levels and the inability of hoteliers to increase room rates.”

The sector’s relatively sluggish performance in the first half of the year caused CBRE Hotels to downgrade its forecast for the year.

“[But] through it all, it is important to note that we are forecasting continued, less volatile revenue and profit increases for the foreseeable future. That is not a bad combination,” Woodworth said.

STR, Hendersonville, Tenn., had a more optimistic outlook. It said U.S. lodging demand increased 1.6 percent during first-half 2016 compared to first-half 2015. At the same time, hotel room supply rose by just 1.5 percent, resulting in a 0.1 percent occupancy boost. For total-year 2016, the sector will likely report flat occupancy at 65.5 percent, a 3.2 percent rise in average daily rate to $124.12 and a 3.2 percent increase in revenue per available room to $81.26, the market research firm said.

“Rates will be the driver of RevPAR growth this year,” STR president and CEO Amanda Hite said. “We’re selling more rooms than ever before, we’re setting records, we’re not forecasting a recession.”

Looking at hotel expenses, Cornell University School of Hotel Administration Professor Jack Corgel said he analyzes inflation-adjusted price changes “because the pace of inflation is typically a good proxy for changes in [hotel] operating expenses.” He noted that the 3.5 percent nominal increase in average daily room rates forecast for 2016 represents a 2.5 percent real change. “Unfortunately for U.S. hoteliers, we are starting to see a divergence between changes in inflation and changes in hotel operating costs.” 

Corgel noted that hotel operating expenses increased 4.7 percent last year. Because the Consumer Price Index rose just 0.1 percent for the year, this equated to a 4.6 percent real expense increase–the greatest real change in expenses since 1978.