Building windows

Global Hospitality Advisor: Hospitality: What If There Is A Recession?

PKF Hospitality Research (PKF-HR) recently released a study of the potential impact of an economic recession on the U.S. lodging industry. While PKF-HR does not anticipate a near-term economic recession, some industry participants are beginning to worry. Our current forecast without a recession calls for a compound annual growth rate of 5.5 % in RevPAR for the typical U.S. hotel during the next 3 years. However, should the unexpected happen and economic indicators (such as gross domestic product, employment and real personal income) decline, then the average U.S. hotel is forecast to achieve annual RevPAR growth of just 2.0 % through 2010.

In the event of an economic recession that parallels the previous two national downturns, the U.S. lodging industry could lose an estimated 6.1 % in revenue. This is the result of 2.2 % fewer occupied rooms and the inability to raise room rates as aggressively because of more competitive market conditions. Using PKF-HR’s pessimistic economic assumptions, the hypothetical loss in lodging industry revenue would mostly be the result of a drop in occupancy, not a decline in ADR.

Prior to the recessions of the early 1990s and 2000s, the industry experienced a big increase in supply. Given the relatively slow growth in supply seen since 2002, plus the current disciplined financing environment, an economic recession would result in a slowdown of the progression of proposed hotel projects through the development pipeline. Under PKF-HR’s recession scenario, an estimated 66,000 fewer rooms will be built during the next 3 years.

An economic recession will have varying degrees of impact on the major segments of the lodging industry. History has proven that the hotels that are most vulnerable to a decline in utilization are those that are already lagging in performance. Given the recent sub-par results of midscale properties with food and beverage, we would be most concerned about this chain-scale segment if a recession were to occur.