HENDERSONVILLE,
Tennessee—Signs of a recovery for the U.S. hotel industry might be few
and far between as 2009 creeps to a close, but executives at Smith
Travel Research think there’s reason for optimism in the future. An
uptick for the hotel industry won’t come soon—as in the next six or
eight months—but it should be in full swing by 2011, according to STR’s
latest U.S. industry forecast.

Mark Lomanno	Randy Smith

“I wouldn’t call it optimistic for 2010, but it’s definitely optimistic
for 2011,” said Mark Lomanno, STR’s president. “Overall conditions in
the economy will begin showing significant improvement as 2010 unfolds,
and that will help fuel a recover for the hotel industry.”

“2009 has been an extremely difficult year, but in
spite of that difficulty, the hotel industry has remained profitable
overall,” said Randy Smith, STR’s co-founder and chairman. “There are a
lot of individual properties in trouble, and we haven’t seen the end of
properties in serious trouble, but overall the industry has continued
to make money. This industry still makes money, and that’s more than a
lot of industries can say.”

The company’s revised forecast includes some tweaking
of its 2009 and 2010 outlooks, as well as its first look at 2011 for
the hotel industry:

Occupancy: 2009 will end at -8.8
percent (revised from -8.4 percent); 2010 figures will be down 0.2
percent (revised from -0.6 percent); and 2011 will be up 2.4 percent.

Average daily rate: 2009 will close
down 8.9 percent (revised from -9.7 percent); 2010 will be down 3.4
percent (unchanged from previous forecast); and 2011 will be up 5.5
percent.

“In
the current cycle, it’s increasingly easy to predict supply and a
little easier to predict demand,” Lomanno said. “What is difficult is
predicting rate growth … how aggressive the industry will be in raising
rates is virtually impossible to predict.”

“As this thing hopefully starts to wind down, the
industry will be well positioned for a recovery as the supply growth
rate will drop,” Smith said. “The question really gets back to room
rates and how aggressively the industry can raise them.

“We’ve seen the worst of the rate declines,” he said. “We’ll see some improvement on that front, but it will be difficult.”

Revenue per available room: 2009’s
RevPAR will decline 17.0 percent (revised from 17.1 percent; it will
drop 3.6 percent in 2010 (revised from -4.0 percent) before jumping 5.5
percent in 2011.

Supply: The number of guestrooms
will end 2009 up 3.2 percent (revised from +3.0 percent); up 1.8
percent in 2010; and up 0.8 percent in 2011.

“The construction pipeline will mostly be built between now and early
2011,” Lomanno said. “There is a potential for that (2011) number to be
a little lower. However, for that to happen, the number of removals
from the supply will have to dramatically increase.”

“There’s a constant drain on the industry to continue
to support marginal properties,” Smith said. “Properties that go
bankrupt yet stay open and obsolete properties that should be
demolished yet stay open are all drains on good operators of
properties. Some way to close those properties would be a reward to all
of the operators who perform well year after year.”

Demand: Room demand in 2009 will be
down 6.0 percent (revised from -5.5 percent) before turning positive in
2010 at +1.6 percent (revised from +1.3 percent). Demand will grow 3.2
percent in 2011, according to the STR forecast.

Demand
recovery will start in the second half of 2010, Lomanno said. When
demand growth reaches 2 percent, the industry will begin to regain
pricing power, he added.

“Going into 2011 there certainly will not be much in
terms of supply growth, and that will be a huge advantage for the
industry,” Smith said. “Any demand growth will be exacerbated by the
lack of supply growth. Plus, pent-up demand will prove to be a big
stimulant for a recovery.”

While the executives have their eyes on some good
news in 2011, they said the industry, as well as the overall U.S.
economy, is by no means out of the woods.

“Clearly commercial real estate will be a second shoe
dropping in 2010,” Smith said. “That’s going to be a process that will
hurt demand for the hotel industry. A huge chunk of demand for our
industry will continue to be wiped out as long as the construction
industry is on its back.”

Smith said demand actually hasn’t changed much during
the last couple of years, but because of the huge additions to the
supply, the industry’s performance metrics have suffered.

“The demand is actually there,” he said. “What we have screwed up is the supply side and the pricing side.”

Uncertainty among small business owners over
increased taxes and health-care costs will continue to hinder any
recovery in the short term, according to Smith.

“Those small business owners have to have a comfort
level to be able to plan ahead for fixed costs, and when that happens
they can then spend money on putting more people to work,” he said.