When Occupancy Starts Slipping, Don't Let Go of Rate

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Moments after calling demand growth the past 18 months “absolutely amazing” and “way beyond our expectations,” STR founder Randy Smith cautioned that demand growth would drift downward to more normal levels in the next six to 12 months. And with rate growth still lagging, Smith said that decline could have a “devastating” effect.

“I think the real test will be for revenue managers,” Smith during a candid Q&A session at the Hotel Data Conference in Nashville. “That was the problem (in 2008) when rates were really moving and then just collapsed. That's the time period we need to be looking at and that can't happen again.

“That could be something we're confronted with in 18 or 12 or even six months if demand is slowing down again.”

Sobering thoughts from the man behind the numbers that track and foretell the industry's performance. If rates have barely climbed despite record occupancy gains, what would happen if occupancy actually falls a little?

“It's going to be devastating if we drop rates again,” Smith said. “We could go from being a profitable industry. We need to avoid what we did wrong. Otherwise we'll be in a world of hurt.”

Although still off peak levels of revenue reached in 2007, the industry has made steady and sustained gains in RevPAR. Demand climbed beyond previous highs of 85 million roomnights a month to more than 90 million, despite a sluggish economy and limited GDP growth.

Despite the reality check from Smith, STR released only slightly downgraded forecasts for this year (6.5% RevPAR growth compared to last year's projected number of 7.4%, and 4.9% next year). PricewaterhouseCooper's outlook was a little more optimistic, with RevPAR expected to climb 7.2% this year and 5.6% next year. PKF's revised forecast called for 6.7% RevPAR gains this year and 6.2% in 2013.

So the hotel industry continues to improve, is projected to do so for the foreseeable future and the mood at the Hotel Data Conference was something less than confident. Adam Sacks, president of Tourism Economics, opened the event by calling today's economy a “high stakes game of chicken” with the U.S. on the edge of the fiscal cliff. Throw into the mix the European debt crisis, Middle East unrest and the upcoming election here, and there were more than enough warning signals to quiet the recent wave of optimism.

I think I felt more confident leaving last year's Hotel Data Conference on the day the stock market collapsed and the Dow fell 513 points.

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