The U.S. hotel industry, which has functioned as a well-oiled machine for the past few years, now is in the midst of a relative slowdown expected to last at least until the end of 2008, according to a report by industry tracker Smith Travel Research. While hotels' financial fundamentals remain strong and rates high--and there is no reason to believe their profit parade will halt--the current dip is evident.
The main problem for hotels is that supply growth is increasing while demand growth is waning. In 2005, supply inched ahead only 0.1 percent, while demand surged by 3 percent. The gap narrowed last year, with 0.6 percent supply increase and 1.1 percent demand gain. Now, through the first five months of 2007, demand growth (0.5 percent) has fallen below supply growth (1.2 percent).
The effect on hotels' average occupancy rates is vivid. After 2.9 percent occupancy growth in 2004, that increase fell to 0.5 percent last year, and this year occupancy actually has declined by 0.5 percent. Still, occupancy remains at a historically high level-–63.2 percent through May 2007. As recently as May 2003, occupancy had reached a nadir of 58.5 percent.
For the hotel industry, the bottom line is slowing profits. Average daily rate growth is down from 7 percent in 2006 to 5.8 percent through May 2007. Even worse, revenue per available room (), a leading financial indicator for hotels, is down to 5.1 percent growth this year, compared with 7.5 percent last year. But these effects are less pronounced in the country's 25 largest hotel markets. For example, the RevPAR gap between those markets and the rest of the country surpassed $30 in April, the largest such disparity in at least 20 years, according to Smith Travel.
These trends are not expected to be short-lived. Smith Travel projects supply growth will remain ahead of demand growth through next year, with occupancies, average daily rate growth, and RevPAR growth continuing to inch downward.
Much of the supply growth is in the country's largest markets. As of April, approximately 10,800 rooms were under construction in Las Vegas, followed by New York (8,100), Chicago (6,500), Washington (6,400), and Orlando (5,200). However, in the category of rooms under construction as a percentage of existing supply, those markets all were outpaced by San Antonio (12.9 percent).