It's about time. After three straight years of falling revenues and lower occupancies, the hotel industry is finally making a comeback. For the first four months of 2004, revenue per available room (RevPAR) at chain-affiliated hotels in the top 50 markets was up 7.5% to $62.51 from $58.13 during the same period a year ago.

What's more, occupancy levels jumped from 61.7% to 64.5% and the average daily rate (ADR) increased 2.9% to $96.93 from $94.22, according to R. Mark Woodworth, executive managing director of The Hospitality Research Group, a division of PKF Consulting in Atlanta. “It's very clear that the economy is expanding and the behavior of the lodging industry is linked to the economy,” says Woodworth.

Perhaps the most important indicator of an industry rebound is the increased demand for hotel room nights. Room night demand, which measures the number of actual rooms sold, jumped by about 161,000 to 2.56 million during the first four months of this year compared with the same period in 2003, according to Smith Travel Research. The combination of increasing demand and declining supply growth — particularly fewer new full-service hotels under construction — also is fueling the hotel sector turnaround.

“The industry is the most optimistic it's been since 2000,” says Mark Lomanno, president of research for Smith Travel. Key reasons for the optimism include stronger midweek business travel, an increase in group bookings and the dissipation of travel fears among American consumers.

Hotel REITs are similarly optimistic because they have watched their stocks jump in direct response to heightened real estate values, positive industry fundamentals and a rising stock market in general, says Jack Corgel, managing director at PKF's Hospitality Research Group.

Room Rates on the Rise

In many cases, hotels are raising rates for the first time since 2000. “The watch word about this time last year was ‘cautiously optimistic.’ Now people are finally feeling good enough to move rates,” says Bruce Wiles, president and COO of MeriStar Hospitality Corp.

Hilton Hotels Corp. is looking forward to a strong year. In spite of a weak market in Chicago, which has yet to fully recover from lower convention business, ADR at Hilton properties increased 0.6% to $146.65 during the first quarter of 2004, compared with $145.82 during the same period last year. RevPAR jumped 2.9% to $100.16 from $97.40 and occupancy was up 1.6 points to 68.3%.

Certain markets, such as Orlando and New York, are stronger than expected. Even struggling areas like San Francisco, hit hard by the bust of the high-tech industry, will start turning around, says Ted Middleton, Hilton's senior vice president of acquisitions and finance. In fact, Hilton projects that RevPAR at hotels it owns will increase by about 5% to 7% in 2004.

FelCor Lodging Trust Inc. also started increasing room rates at many of its hotels after watching occupancy rates rise. For the first quarter of 2004, occupancy rose 5.2% to 64.4%, and RevPAR rose 4.4% to $62.57.

Expansion Plans

Hotel companies are once again focusing on growth through acquisitions. MeriStar, for example, closed on the sale of the Ritz-Carlton Pentagon City in Washington, D.C., in April for $93 million. Felcor, in turn, purchased the Holiday Inn in Santa Monica, Calif., for $27 million in March.

Limited-service hotel companies, including Equity Inns Inc., also are jumping on the acquisition bandwagon. Equity, the nation's largest owner of Hampton Inns with 45 of the branded properties, agreed in January to purchase a portfolio of two Marriott Courtyards and three Residence Inns by Marriott for $35.6 million.

Even companies that aren't expanding portfolios are planning to augment business as demand accelerates and the meetings business kicks into high gear. Boykin Lodging Co., owner of 29 hotels from Florida to Washington, converted space to high-tech conference centers at Doubletree hotels in Omaha, Neb.; Berkeley, Calif.; and Portland, Ore. “We feel it has unlocked a whole new segment,” says Boykin President and COO Richard Conti.

Hilton isn't building or buying convention hotels, but it is investing in properties that it will manage and flag. Over the past nine months, Hilton invested in three convention hotels in Austin, Houston and Omaha, according to Middleton. “We're focused on this strategy to play off the strength of the big-box convention hotels.”

IMPROVING VITAL SIGNS FOR LODGING INDUSTRY*

1Q 2003 1Q 2004 2005**
Occupancy 61.7% 64.5% 66.2%
% Change (Year over Year) 0.3% 4.5% 2.6%
Average Daily Rate $94.22 $96.93 $100.01
% Change -1.1% 2.9% 3.2%
RevPAR $58.13 $62.51 $66.20
% Change -0.8% 7.5% 5.9%
*Figures reflect performance of chain-affiliated hotels in the Top 50 markets.
**Projected results
Source: PKF Consulting