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Hotel guests to pay more in 2005.

After three years of declining hotel rates, consumers are seeing a reversal of that trend and are beginning to experience price increases for their lodging stay. In addition, rate increases are beginning to escalate. Based on the recently updated Winter 2005 Hotel Outlook forecasts of lodging industry performance prepared by Atlanta-based PKF Hospitality Research ("PKF/HR") and Boston-based Torto Wheaton Research ("TWR"), room rates across the Top 50 hotel markets in the U.S. will increase by 3.7 percent in 2004, followed by another 4.7 percent bump in 2005. Stronger demand levels, combined with the increasing use of savvy price-setting practices by both hotel chains and individual property managers, are making hotel bargains harder to come by.

Outlook Varies Significantly Across Markets

"The anticipated room rate increases in New York City of 13.7 percent in 2005 will lead the nation," noted R. Mark Woodworth, executive managing director of PKF Hospitality Research. "Occupancy levels in New York City have broken through the 80 percent barrier this year, thus making rooms not only more expensive, but also harder to come by," noted John Fox, PKF Consulting's practice leader in New York. Based on data compiled by Smith Travel Research, room rates for all chain-affiliated hotels in New York City increased by approximately 10.2 percent through the first nine months of 2004. By year-end, PKF/TWR forecasts hotel prices will end up 9.3 percent above their 2003 level. New York City occupancies will reach 82.6 percent this year and will climb to 84.0 percent in 2005.

Four of the Top Five growth markets for 2005 (New York, Tampa, Los Angeles and West Palm Beach) are coastal cities that function, to varying degrees, as financial and economic hubs on a national and/or regional basis. The bright outlook for Phoenix (also ranked in the top 5) comes from a combination of strong business growth and continuing strength in leisure travel.

New York is not only the leading market in terms of expected increases in average daily rate, but it is also the most expensive hotel market in the nation. The 2005 forecast average price of a room in New York City of approximately $237 is almost $100 higher than the next closest market, which is Honolulu with a 2005 forecast rate of approximately $143. Not surprisingly, Boston, San Francisco and West Palm Beach round out the top 5 most expensive U.S. hotel markets. "It is also interesting to note that the average room rate in the top 50 markets will top $100 for the first time since 2000", stated Woodworth.

Flat Prices Remain in Certain Markets

Not all hotel operators will be able to increase their prices in 2005. The average hotel in Houston, Kansas City, Columbus (Ohio) and on Long Island is expected to experience a slight decline in average room rate next year. Room rates in Cleveland are also expected to be flat next year. "In general, we expect the interior markets to continue to recover at a slower pace than the country as a whole," Woodworth noted. "Travelers to these markets will benefit from generally weaker industry fundamentals which will inhibit most operators from bumping room rates in 2005." An imbalance between the available supply of hotel rooms in these markets and the demand for these lodgings leaves the pricing power in the hands of the customer in these markets. "It is interesting that the average occupancy level in these five markets for 2005 (61.4 percent) is well below the occupancy level forecast for the top 50 U.S. markets (66.6 percent)," Woodworth said.

Who Benefits?

While rising room rates are worrisome news for travelers, it is glad tidings for hotel owners and operators. "Hotels are most profitable when room rates are able to grow above the pace of inflation," Woodworth said. From 2000 to 2003, U.S. hotel room rates have declined 6.4 percent. This has contributed to a 36 percent drop in hotel profits during the same period. "Given the increases in room rates forecast for the next few years, we are expecting hotel profitability to once again begin to rise," Woodworth concludes.

PKF Hospitality Research (PKF/HR),  headquartered in Atlanta, is the research affiliate of PKF Consulting, the San Francisco-based consulting and real estate firm specializing in the hospitality industry. PKF Consulting has offices in New York, Boston, Philadelphia, Washington D.C., Atlanta, Indianapolis, Houston, Dallas, Los Angeles and San Francisco. The firm's website is www.pkfc.com.

For more information on PKF Consulting's Hotel Outlook forecasts, please contact Mr. Claude Vargo at (404) 842-1150, ext 237 or claude.vargo@pkfc.com.

Reprinted with permission.

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