Business travelers hold back hotel recovery

October 01, 2002 |

Last year was far from a stellar year for hotel construction spending, with the sector dipping 11.5% over the year. This year will see another double-digit decline, largely due to the slow return of business and leisure travelers.

The Commerce Department estimates that a total of $5.64 billion was spent on hotel and motel construction during the first six months of 2002. This was a steep decline of 23.6% from the total for the same period in 2001.

Although spending is expected to end this year at least 25% below the already-depressed 2001 total, the back-to-back declines won't compare to the recession of the early '90s. Between 1990 and 1991, total dollars spent on lodging construction plunged by 35% — only to be followed by an even-steeper 46.8% drop during 1992.

Business and leisure travel hasn't expanded during the past year, but it hasn't declined to the degree feared in the aftermath of September 11. The lodging industry shows no signs of being seriously overbuilt in any major market of the country, at least given a longer-term perspective on the supply-demand fundamentals. Current inventory levels (number of rooms) aren't far out of line with the demand that is expected to materialize once the erratic economic recovery firmly takes hold.

This being said, the industry has suffered in the short term. Smith Travel Research (STR), a Hendersonville, Tenn.-based research and consulting company, reports that the national hotel occupancy rate was just 63.3% during the second quarter of 2002, a decrease of 1.9% compared to the same quarter in 2001.

STR estimates that revenue per available room, a key industry productivity measure that combines data on occupancy and average room rates, decreased 4.8% in the second quarter. Industry room supply increased 1.7%, while demand was flat.

Over the first half of 2002, STR reports that occupancy declined 3.6% to a level of just 59.5%, while the average room rate slipped by 4%. First-half 2002 revenue-per-available-room decreased 7.4%. Room supply growth did slow over the first six months of 2002 (to 1.8%, down from 2.7% a year ago), but demand fell an even-steeper 1.9%.

Despite all of this, STR estimates that hotel industry operating performance will improve slightly for 2002 as a whole versus 2001, assuming no further shocks to the economy that dampen the current slowly improving trends in business and leisure travel.

It's expected that downtown, full-service, and resort-community-lodging construction will decline at the steepest rate during 2002. This is because business travel has been particularly slow to recover from the terrorist shocks and the overall recession. However, development activity for properties within reasonable driving distance of major population centers and for limited-service lodging facilities has held up reasonably well during this year.

Nevertheless, the bellwether measure of industry profitability — average revenue per available room — is likely to decline moderately in 2002, before registering solid improvement over the course of 2003. All in all, the current lodging industry environment isn't conducive to increased aggregate spending for hotel/motel development. But improved industry profitability next year should lead to some selective new project development, and a great deal more money will be directed towards renovating and remodeling existing properties.

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