The average U.S. hotel will suffer a 1.6% decline in operating profits this year, the first decline since 1991, a prominent hospitality research firm has projected.
PKF Consulting of San Francisco forecasts that a combination of declining occupancy and sluggish growth in room rates will lead to revenue growth of just 0.2% by yearend. That rate is not only "anemic" but a full two percentage points below the estimated rate of inflation, PKF said. Hence, hotels will have difficulty cutting costs, and profitability is expected to fall.
But PKF says the decline in profitability will not result in the mass bankruptcies and workouts that burdened lenders in the early 1990s. Last year 86% of the hotels that PKF surveyed across the country earned enough from their operations to make interest payments on their loans. On average, these properties' net operating incomes were 1.74 times their interest expenses.
"That shows a comfortable margin. There's still a cushion," said John Fox, senior vice president in PKF's New York office.
PKF's forecast is based on a survey of 2,600 hotels nationwide. Separately, PKF looked at a smaller sample of hotels in 44 major metropolitan areas, and determined that the average hotel occupancy rate in these markets will decline 1.7% this year to 70.6%. Two-thirds of those big-city markets had lower occupancy rates in the first six months of 1999 than in the same period last year. The decline in occupancy levels is the result of "tremendous increases in the supply of hotel rooms," Mr. Fox said.
Of greater concern for hotel owners and operators, PKF said, is that in the first half of 1999 the average daily room rate in the 44 big cities grew only 2.2% -- equal to the government's estimate for growth in the Consumer Price Index this year. By comparison, from 1994 to 1998, PKF said, the average daily rate for big-city hotels grew at three times the pace of inflation.
PKF found that travelers have become tougher negotiators for lower rates, whereas in previous years they were willing to pay 5% to 8% more each year for hotel rooms. As occupancies have declined, hotel managers have been willing to forgo higher room rates to maintain market share.
PKF expects the hotel sector to stabilize in 2000, when the average occupancy rate in the 44 major cities is projected to increase a slight 0.2%, to 70.8%. The average daily room rate is expected to grow 2.8%, to $117.44, ahead of the estimated 2.3% inflation rate for 2000.