As a result of gains in employment, increases in personal income, and overall positive growth in the gross domestic product, in 1996 U.S. consumer confidence was at its highest level since 1990. The strengthening of the national economy resulted in increased consumer spending in the travel and tourism industry which pushed the national average hotel occupancy rate to a 15-year high of 65.8 percent. Simultaneously, the 1996 average daily rate ("ADR") of $71.73 was up 6.4 percent over the previous year, surpassing inflation by 3.5 percentage points, the highest margin in nearly 10 years. The lodging industry is estimated to have generated $83 billion in revenues in 1996, which represents a 9.5 percent increase from 1995 and the largest improvement since 1987.
While Coopers & Lybrand estimates moderate lodging demand growth in the upcoming years, ADR is expected to continue to rise at a rate greater than inflation. This is estimated to result in seasonally adjusted revenue per available room (RevPAR) growth that is nearly double the rate of inflation through 1999. Contributing to the strong RevPAR growth are savvy hotel owners holding management companies more accountable for hotel profits and the streamlining of operations by limiting unprofitable food and beverage services, increasing employee productivity, and generally improving expense controls.
As a result, profits measured in dollars, as a percentage and as an amount per available room are at industry-wide levels never seen before.
Between 1980 and 1996, 113 new brands were introduced in the lodging industry. Fifteen of those were introduced in 1984, just one year before room starts peaked at 156,000 as a result of the 1980s building boom. Today, the lodging industry finds itself in the midst of another growth period fueled by two major factors. Profitability has been at record levels since 1993, and lenders and Wall Street investors have reopened the spigots of the once-tight money supply for hotel acquisition and construction. In the past 12 months alone, the formation of 10 new brands has been announced and room starts have climbed to the highest levels since 1989.
In 1996, overall room starts totaled 102,000 up from 85,000 the previous year. The initial wave of new room openings was concentrated in the limited-service, midscale, and upper-economy sectors. There has also been a surge in all-suite and extended-stay construction while full-service and luxury hotel starts remain low because replacement costs still exceed acquisition costs. However, with the gap between replacement and acquisition costs continuing to narrow, the number of full-service and luxury construction projects will most likely increase in the foreseeable future. While construction of such hotels would have been almost unthinkable even three years ago, strong demand in such cities as New York, Boston, and San Francisco has made new development a viable option to both investors and developers.
A closer look at macro market trends reveals that supply growth in the Central Region is outstripping demand growth resulting in declining occupancy rates. Although ADR is expected to continue to increase, there is a need to be cautious of overbuilding in "hot" markets such as Dallas, Atlanta, Orlando and Phoenix. The Coastal Regions which lagged in new room starts -- because they were harder hit by the recession -- exhibited the strongest lodging performance in 1996. As a result, these areas are expected to experience an infusion of new room starts in the upcoming years. However, excessive new construction resulting from rapid growth strategies by new lodging brands trying to gain market exposure could lead to over-development in certain regions that are only now waking up to this latest cycle of expansion.
To ensure the long-term health of the national lodging industry is sustained, consultants, investors, lenders and developers are well advised to exercise caution, and to be selective and forward-thinking when evaluating potential projects.