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Hoteliers Still Wary Even as NOIs Recover

By Mark Heschmeyer
September 1, 2010

Based on the strong surge in lodging demand that occurred during the first half of 2010, new forecasts from Colliers PKF Hospitality Research (PKF-HR) and PricewaterhouseCoopers are calling for a continued increase in demand and net operating incomes.

Colliers PKF Hospitality Research
Colliers PKF Hospitality Research (PKF-HR) now forecasts that the average U.S. hotel will achieve a 2.3% increase in net operating income (NOI) during 2010. This follows a 37.8% cumulative decline in profits experienced from 2007 through 2009, and is the first annual uptick in forecasted NOI since 2007.

"The bottom-line losses suffered by hotel owners over the past two years were devastating, and the repercussions have been, and continue to be, felt throughout the financial community," said R. Mark Woodworth, president of PKF-HR. "The likelihood that this trauma is coming to an end is welcome news. With occupancy driving the growth in RevPAR in 2010, the rise in profits at this stage is somewhat underwhelming. However, going forward we will begin to see a more profitable formula for revenue growth as operators reclaim pricing leverage and room rates begin to rise. That being said, operators must pay attention to the significant increases in operating costs that we've consistently observed during past recovery periods."

PKF-HR forecasts double-digit growth in unit-level NOI growth each year from 2011 through 2013.

The improved outlook for 2010 bottom-line performance is the result of increasing optimism about the top-line. In the recently released September 2010 edition of Hotel Horizons, PKF-HR forecasts a 4.6% increase in revenue per available room (RevPAR) for the U.S. lodging market in 2010. This is the result of a projected 5.2% rise in occupancy, but a 0.6% decline in average room rates (ADR).

"Our analysis confirms that the sharp rise in demand during the first half of 2010 is partially attributable to the low level of room rates," Woodworth added.

"The projected 5.2% annual increase in occupancy during 2010 is based on the strong 7.0% growth in lodging demand reported by Smith Travel Research (STR) for the first half of the year, plus the modestly optimistic economic forecast prepared by Moody's in July of 2010," Woodworth said. "While our 2010 performance projection has improved over previous forecasts, we are becoming a bit more concerned about the economic environment that lies ahead. We like what we've seen so far in 2010, but we are starting to notice some potential economic headwinds that could pose a threat to hotel performance."

"Uncertainty impacts the psyche of both hotel operators and their potential guests. We have identified several factors that are a cause for concern: persistent high levels of unemployment, continued weakness in housing, airline capacity constraints, the November elections, and the tax policies that expire on January 1, 2011," stated John B. Corgel Ph.D., the Robert C. Baker professor of real estate at the Cornell University School of Hotel Administration and senior advisor to PKF-HR.

PricewaterhouseCoopers' U.S. lodging forecast expects the lodging recovery that accelerated in the first half of 2010 to gain further traction during the remainder of 2010, as increasing demand begins to rebalance pricing power. Although the pace of demand growth is expected to moderate during the second half of 2010, the recovery is expected to shift from almost exclusively demand-driven to a mix of demand and room rate growth, confirming the return of the business segment.

With growing demand and decelerating supply growth, PricewaterhouseCoopers anticipates that the U.S. occupancy rate will increase 2.6 percentage points for 2010, reaching 57.2%. The pricing outlook for the remainder of 2010, and 2011, has improved substantially, resulting in an earlier-than-expected recovery in ADR during the second half of 2010. This synergistic effect is expected to result in a 4.1% increase in RevPAR in 2010.

PricewaterhouseCoopers' quarterly lodging forecast is based on an updated macroeconomic forecast from Macroeconomic Advisers LLC that reflects a deceleration in the growth of the U.S. economy during the remainder of 2010, but an outlook for a return to an above-trend growth in 2011.

Despite lower macroeconomic growth forecast for the remainder of 2010, stabilized conditions among businesses and consumers provide the context for continued lodging demand growth in 2010, albeit at a slower pace than the first half of the year.

The current slowdown in hotel construction activity is a key element in the foundation for recovery in operating performance of existing hotels. The pace of new construction starts fell from 133,000 rooms in 2008, to 47,000 in 2009, and most recently to approximately 32,000 rooms (annualized) in the second quarter of 2010. This sets the context for progressively slower supply growth of 2% in 2010, and just 0.4% in 2011. The recovery of business travel is expected to continue as recent corporate earnings reports suggest a more confident segment willing to travel. As a result, ADR decline is expected to moderate to just 0.6% this year, followed by robust room rate growth of 4.1% in 2011.



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