Jones Lang LaSalle
Phasing Out & Phasing In
Looking at our Winter 2006 forecast, many are noticing that some of the markets that produced banner results in 2004 and 2005 are set to slow in 2006. Never fear! We are not projecting that the hotel industry in these markets will crash, nor are we saying that the hotel recovery is over. Rather, some markets have had the benefit of a rapid recovery and are now at the end of their expansion phase, meaning that they will now shift down to a stabilized pace of growth. The good news is that there are several other hotel markets that have not yet come to the end of their expansion phase and as a result, they are going to see above-average growth in RevPAR and above-average room rate increases in the year ahead.
The graph below illustrates RevPAR growth over the past year and compares it to projected growth over the coming year. We can see that such markets as Fort Worth, Austin, the Florida markets (Fort Lauderdale, Miami, and West Palm Beach), Orange County, New York, and Washington D.C. had substantial growth in RevPAR over the past year; we will refer to this group as Group 1. While such markets as Boston, Newark, San Francisco, Albany, and Houston had below average RevPAR growth during 2005; we will refer to this group as Group 2. It's just the case that Group 1 is ahead of Group 2 in their cycles.
RevPAR Growth: Good Times Can't Necessarily Last
When a market begins its expansion phase, occupancy has increased to its long-term average, rents (i.e. room rates in the case of hotels) are beginning to rise and no new supply is being added. Once a market has completed the expansion phase, rents have seen a rapid increase and the market is poised to take on some new construction. Following the expansion phase is the hypersupply phase, in which new supply has started to enter the market and rent growth is positive, but declining. We believe group 1 is at the end of its expansion phase and beginning the hypersupply phase. Group 2, however, is just getting to its expansion phase.
Looking specifically at demand, it is necessary to exclude two of the strongest markets, Austin and Fort Worth, as exceptions to our phase analysis, because Austin and Fort Worth were both witness to the "hurricane effect" during the 3rd quarter of 2005. The Katrina and Rita evacuees brought a wave of temporary demand to these markets that inflated their results. The effect was exogenous and thus outside of any discussion with regard to its real estate cycle.
How do we know that Group 1 is at the end of its expansion phase? One bit of evidence is that these markets are above their long-term occupancy level. All of the markets in Group 1 have surpassed their long-term average for occupancy by over 200 basis points--West Palm Beach leads the pack with an 800+ basis-point difference. Now we look at room rates, specifically real room rates. Each of these markets has passed its previous real ADR peak in either the full- or the limited-service sector. Thus, it's no wonder that our models are predicting a slowdown in RevPAR. They are at the end of their expansion phase; it's not a bad thing, just the culmination of good results.
As to Group 2, if we first look at occupancy, we can see that Albany and Richmond are at or getting close to long-term average levels in occupancy. The other markets in the group are still trailing behind their long-term average, but occupancy continues to increase. Likewise for room rates--none of the markets in Group 2 have surpassed their previous peak levels for real room rates. Therefore, these signs point to these markets either entering or being already in expansion, thus poised to produce much improved results this year.
Using market cycles, we can see that some of the hotel markets that have had a rapid recovery during 2005 will have positive but slowing growth in 2006, while those markets that are poised to have a greater recovery in 2006 will soon see accelerating performance. The hotel recovery in 2005 was spotty with some markets clearly leading the pack. This year is the year that the rest of the pack starts to catch up.
Phasing Out & Phasing In
Looking at our Winter 2006 forecast, many are noticing that some of the markets that produced banner results in 2004 and 2005 are set to slow in 2006. Never fear! We are not projecting that the hotel industry in these markets will crash, nor are we saying that the hotel recovery is over. Rather, some markets have had the benefit of a rapid recovery and are now at the end of their expansion phase, meaning that they will now shift down to a stabilized pace of growth. The good news is that there are several other hotel markets that have not yet come to the end of their expansion phase and as a result, they are going to see above-average growth in RevPAR and above-average room rate increases in the year ahead.
The graph below illustrates RevPAR growth over the past year and compares it to projected growth over the coming year. We can see that such markets as Fort Worth, Austin, the Florida markets (Fort Lauderdale, Miami, and West Palm Beach), Orange County, New York, and Washington D.C. had substantial growth in RevPAR over the past year; we will refer to this group as Group 1. While such markets as Boston, Newark, San Francisco, Albany, and Houston had below average RevPAR growth during 2005; we will refer to this group as Group 2. It's just the case that Group 1 is ahead of Group 2 in their cycles.
RevPAR Growth: Good Times Can't Necessarily Last
When a market begins its expansion phase, occupancy has increased to its long-term average, rents (i.e. room rates in the case of hotels) are beginning to rise and no new supply is being added. Once a market has completed the expansion phase, rents have seen a rapid increase and the market is poised to take on some new construction. Following the expansion phase is the hypersupply phase, in which new supply has started to enter the market and rent growth is positive, but declining. We believe group 1 is at the end of its expansion phase and beginning the hypersupply phase. Group 2, however, is just getting to its expansion phase.
Looking specifically at demand, it is necessary to exclude two of the strongest markets, Austin and Fort Worth, as exceptions to our phase analysis, because Austin and Fort Worth were both witness to the "hurricane effect" during the 3rd quarter of 2005. The Katrina and Rita evacuees brought a wave of temporary demand to these markets that inflated their results. The effect was exogenous and thus outside of any discussion with regard to its real estate cycle.
How do we know that Group 1 is at the end of its expansion phase? One bit of evidence is that these markets are above their long-term occupancy level. All of the markets in Group 1 have surpassed their long-term average for occupancy by over 200 basis points--West Palm Beach leads the pack with an 800+ basis-point difference. Now we look at room rates, specifically real room rates. Each of these markets has passed its previous real ADR peak in either the full- or the limited-service sector. Thus, it's no wonder that our models are predicting a slowdown in RevPAR. They are at the end of their expansion phase; it's not a bad thing, just the culmination of good results.
As to Group 2, if we first look at occupancy, we can see that Albany and Richmond are at or getting close to long-term average levels in occupancy. The other markets in the group are still trailing behind their long-term average, but occupancy continues to increase. Likewise for room rates--none of the markets in Group 2 have surpassed their previous peak levels for real room rates. Therefore, these signs point to these markets either entering or being already in expansion, thus poised to produce much improved results this year.
Using market cycles, we can see that some of the hotel markets that have had a rapid recovery during 2005 will have positive but slowing growth in 2006, while those markets that are poised to have a greater recovery in 2006 will soon see accelerating performance. The hotel recovery in 2005 was spotty with some markets clearly leading the pack. This year is the year that the rest of the pack starts to catch up.
posted by Jones Lang LaSalle NJ News Blog at 11:03 AM
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