The light at the end of the tunnel is always cause for hope. When market conditions are at their worst, the promise of a recovery keeps morale from plummeting and gives a reason to keep pushing forward. For the hotel industry, however, there’s nothing but darkness for the next year.
The latest research from PhoCusWright paints a pretty dismal picture, evident immediately from the title of its most recent announcement: “Why Hotels Are Not Recovering Any Time Soon.” But, it could just as easily have been called, “Why Travelers Can Get Dirt-Cheap Rooms in 2010 and Probably 2011.”
Ouch.
If you’re looking for a culprit, start with those two traditional factors — supply and demand.
Demand is off substantially. Conditions right now are worse than they were in the dismal 1990/1991 season and during the post-9/11 recession. Last year, demand fell between 5.5 percent and 6 percent. This is far worse than the 2 percent decline posted in 2002 and the 1 percent drop in 1991. This year, PhoCusWright expects demand to inch higher by 1 percent to 1.5 percent, but this is relative to the severely depressed baseline of 2009. So, we’ll likely reflect at this time in 2011 on a slow recovery that still has some road in front of it.
Fortunately, a 5 percent increase in demand is expected in 2011, followed by a few years of growth in the range of 3 percent to 4 percent. This means that we’ll get back to 2007 levels by the end of 2011 and start to see net hotel market growth in 2012.
Part of the problem that the hotels face is an increase in supply. So, while demand is down, the industry has more beds that need heads in them. The ill-timed increase in demand is the result of projects that began before the financial crisis and subsequent recession. Nobody saw the credit market collapse coming, let alone the downstream effects, as evidenced by the 3 percent increase in supply last year. From 2011 to 2013, supply growth will slow down, though, as bone-dry credit markets and general financial malaise have led many development projects to stall. In fact, PhoCusWright expects hotel supply falls next year and the two years after.
The increase in supply and decrease in demand has put incredible pressure on occupancy. In 2006, hotels were able to put 63 percent of their room-nights to work, but last year, that fell to 55 percent. PhoCusWright expects the increase in demand and decrease in supply over the next few years to support an industry-wide recovery to 60 percent occupancy by 2012. At this level, hotels can usually pick up some pricing power, which translates to an improvement in rates.
In 2009, hotel room rates were of course impacted by the disparity between supply and demand, not to mention the general squeeze on consumer spending. But, these factors weren’t exclusively responsible for the 9 percent drop in rates last year. The hotels themselves bear part of the blame, according to PhoCusWright’s study. In an effort to fill rooms, they engaged each other in a “race to the bottom,” in which they tried to undercut each other for market share at any price.
Given the anemic growth in demand expected in 2010, expect room rates to continue to fall until 2011. The return to pre-recession levels will take a while, particularly given the economic conditions that will be with us this year. The result is another year of depressed revenues for the hotel industry. Last year, revenue per available room-night (RevPAR), the primary metric by which the hotel industry is judged, plunged 17 percent last year and will continue to slide in 2010. PhoCusWright expects the bleeding to stop in 2011, with 2012 RevPAR reaching only 90 percent to 95 percent of the peak levels sustained in 2007.
So, what does all this mean? A full recovery is likely four years away for occupancy and room rates. In 2011, the situation will stop worsening, and it will pick up in 2012, but it’s two years past then than you’ll see the hotels regain their strength. Until then, it’s the consumers’ show. Travel often. Slap a few more nights onto each of your stays. You’re in the driver’s seat.
[Photo via MigrantBlogger]