The hotel industry will continue to feel the effects of the economic downturn into 2009 when occupancy rates will bottom out, according to a new report by PKF Hospitality Research.

In its Hotel Horizons report, PKF projects a 0.2 percent decrease in lodging demand in 2008, followed by a 1.1 percent drop in 2009. If projections hold true, next year would be the third consecutive year that demand has declined, marking the first time that’s happened since 1988. The drop in occupancy is due to an extended slowdown of the U.S. economy and airline capacity reductions, explained Mark Woodworth, president, PKF Hospitality Research, Atlanta, in a news release.

While demand is slowing, supply is increasing. By the end of 2009, there will be 275,000 more hotel rooms in the U.S. compared to year-end 2007. However, looking out to 2010 and 2011, new supply will drop sharply due in large part to the credit crunch. “PKF-HR believes the existing restrictive financing environment will linger into 2009, thus delaying or preventing the start of hotel projects currently in the pipeline,” stated Woodworth. The pace of new supply growth is projected to drop 1.4 percent and 1.8 percent in 2010 and 2011, respectively.

With supply and demand moving in opposite directions, hotels will not be able to raise room rates as aggressively in 2009, stated Woodworth. Average daily rate is expected to increase 1.3 percent in 2009, below the rate of inflation and the 3.6 percent gain in 2008. Occupancy decreases and lower ADR means hotel revenues per available room (RevPAR) will decline 3.2 percent while total revenues will decline 2.5 percent in 2009, the report says.

Woodworth doesn’t expect the downturn to be as steep as recessions in the past, but he says it may take longer than other recessions to fully recover due to capital market turmoil.

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