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Hotel market: Let the good times roll
By WOLFGANG ROOD
By most measures, 1998 was an excellent year for the Seattle hotel market. Even though several new hotels opened during the year, the average occupancy in Seattle increased to 78 percent from 77 percent in 1997. In addition, the average room rate for Seattle hotels increased to $128 from $120.
The two other major lodging markets in the region, Bellevue/Eastside and SeaTac/Southcenter, also did comparatively well.
The Bellevue/Eastside lodging market, while showing a decline in occupancy from 78 percent in 1997 to 74 percent in 1998 also reported the highest increase in the average room rate, 7.4 percent, to $103 in 1998 from $96 in 1997.
The SeaTac and Southcenter market ended the year with a 75 percent occupancy, a 0.9 percent increase over 1997. Here, the average room rate increased by 5.7 percent, to $85.
The Seattle lodging market performance becomes even more impressive when viewed against the background of the 1998 experience of other lodging markets. For that perspective, we compared Seattle with 40 other major city lodging markets across the United States.
Only 3 other cities did better
Surprisingly, only three other cities across the nation achieved a higher occupancy than the 78 percent recorded for Seattle. These cities were San Francisco, reporting 80 percent occupancy; New York City (82 percent); and Boston (80 percent). Seattle ranked well ahead of such popular visitor destinations and commercial centers as Los Angeles (74 percent), Honolulu (74 percent), Denver (70 percent), and Phoenix (69 percent).
One major reason for this difference is that on a national basis, 1998 was the first year since 1991 when supply growth exceeded demand in most urban centers. Primarily because of the effect of new hotels added to the supply, hotels in the major cities of the U.S. posted a 1.6 percent decline in occupancy from the prior year, with 28 of the 41 cities reporting declining occupancy. Seattle was one of only 10 cities showing an improvement in occupancy over 1997.
Room rates up 7%
How about average room rates? Driven by the comparatively high occupancies and the addition of new hotel rooms, the average room rate in the Seattle market increased by 7 percent, from $119.54 in 1997 to $127.90 in 1998. Of the 41 cities, only 10 others were able to achieve a higher increase in average room rates; for all cities the average rate increase was 6.9 percent, from $105 in 1997 to $112 in 1998. The lowest average room rate was in El Paso, Texas, at $51.75; the highest was New York City, at $214.
So where do we go from here?
Judging from recent performance and current trends, we believe the long-term outlook for the lodging market in Seattle is for continued high occupancies and increasing average room rates. Why? Because the variety and quality of hotels in the Seattle area are very competitive with other major cities; the threat of overbuilding appears to have become less acute; the basic economic factors in the Seattle area appear to be solid in the long run; and Seattle is becoming ever more popular to tourists, convention visitors, and commercial demand sources. Consider the following:
However, this danger appears to have eased. Starting during the summer of 1998, stock prices on Wall Street real estate investment trusts declined sharply, with the value of lodging REITs declining an average of 38.3 percent in 1998. This decline, as well as some worry about the national and regional economies, is causing some banks to look more critically at financing hotel projects.
As a result, the growth in new lodging supply will probably slow in 1999. Some planned projects may be delayed or even abandoned, since most, especially larger projects, will be more difficult to finance now. This will be considered good news by existing hotels, making it easier for them to maintain sound levels of occupancies and room revenues.
Of course, there is always the possibility of a regional or national economic downturn, which could seriously affect travel and lodging. But the basic economic factors in the Seattle area seem to be solid, even considering the announced Boeing employment cuts. While these cuts are expected to have some adverse effects on the local economy, it is unlikely they would substantially reduce Boeing related business travel and lodgings in Seattle.
All of these factors are adding fuel to the general perception of travelers that Seattle and the Puget Sound region are scenic, safe and friendly visitor destinations. Even if often cool and rainy, this is considered to be a desirable place to visit, offering a great variety of cultural, recreational and business opportunities.
Across the nation the outlook for hotels located in major cities is for a continued decline in occupancy, accompanied by moderate growth in average daily room rates in 1999.
For the Seattle area, the outlook for 1999 also is for some decline in average occupancy and slower growth in average room rates. But while market occupancy is expected to decline somewhat in 1999 as projects currently under construction enter the market, growing demand is expected to absorb these guestrooms within a relatively short time.
We believe the Seattle lodging market will see a two-percentage point decrease in occupancy in 1999, to 76 percent. We then expect market occupancy to increase again to approximately 78 percent by 2001. The Seattle average room rate is expected to increase at a more moderate three percent rate in 1999, at a three to four percent rate in 2000 and then to increase at or slightly ahead of the rate of inflation in future years.
While the outlook for the Seattle lodging market appears to be very good, there are great differences in the performance of individual hotels based on their specific location, the type and quality of facilities available, direct competition, management, services rendered, and similar factors.
The developers of any new hotel project will have to carefully analyze those market factors that apply to their project specifically, in order to set the stage for successful future operations and attain a sound share of market demand.
Wolfgang Rood, CPA, is a principal in Wolfgang Rood Hospitality Consulting. The data included in this article was based on research and surveys performed by Wolfgang Rood Hospitality Consulting and PKF Consulting. Year-end 1998 statistics are subject to minor adjustments as survey data is finalized.
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