Lessons Can Be Applied To 2011 Budgeting Process
Atlanta GA -- Hotel industry forecasting is not for the faint of heart. During the recession that began in earnest in 2008, the magnitude of the economic declines deviated so far from long run norms that it was virtually impossible for econometric models to predict what ultimately occurred in the hotel industry. Despite the challenge, the lodging forecasts still provided meaningful guidance for owners and investors trying to operate through the historic downturn. Because of the severity of the decline and its length, lodging forecasts had to be updated based on the ever changing economic outlook. These are some of the conclusions of a whitepaper recently published by PKF-Hospitality Research (PKF-HR) whose purpose was to quantify the accuracy of their proprietary Hotel Horizons® reports. The assessment compares forecast changes in hotel market performance measures and actual changes at two critical points during the recent economic cycle (2007 – 2009). The whitepaper report is available on a complimentary basis to all industry participants (www.pkfc.com/accuracy).
“When we initially entered the econometric forecasting business over 10 years ago, we committed ourselves to a process of continuous self-evaluation,” said R. Mark Woodworth president of PKF-HR. “Overall, we remain pleased with our demonstrated accuracy. We have learned that our forecasts are extremely reliable during less volatile periods in the business cycle, but less accurate during turbulent times. These findings will be used to inform our ongoing forecasting efforts.”
PKF-HR’s Hotel Horizons® is a series of periodic hotel forecast reports that analyze the historical and expected performance of U.S. lodging markets. Driven by an econometric forecasting model, the Hotel Horizons® reports cover five years of supply, demand, occupancy, ADR, and RevPAR for 50 major U.S. markets, as well as six national chain-scale segments. Within each market forecast, separate estimates are prepared for upper-price and lower-price hotels. The model relies on historical lodging data from Smith Travel Research, as well as historic and forecast economic data from Moody’s Economy.com.
Ups and Downs
“To assess the accuracy of our macro U.S. and MSA hotel forecasting models, we analyzed two forecast periods,” Woodworth said. “The first ran from the fourth quarter of 2007 through third quarter of 2008. This represents a fairly traditional expansion phase which culminates at the eventual turning point of the business cycle. The second period of the analysis covers calendar year 2009, a period of extreme stress within the lodging industry.”
“These points in time highlight two very different periods of economic expectations: pre-financial crisis, and post-financial crisis,” said John B. (Jack) 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. “Econometric models have a difficult time performing at the turning points of a cycle, and have no ability to predict shocks, such as hurricanes and terrorist attacks. Therefore, we focused on how the model performed during a ‘normal’ period of economic growth, and during a time of economic stress, post-turning point.”
The Results
These distinct periods in the economic cycle yield varying degrees of accuracy. The following conclusions come from the research findings:
1.Hotel Horizons® forecasts closely approximate changes in hotel performance at the national level, and to a slightly lesser extent the MSA level.
2.Hotel Horizons® forecasts are incapable of predicting hotel performance during natural disasters and severe economic shocks; and for the short-term period following these events because of the unique nature of each event.
3.Hotel Horizons® forecasts are very accurate in periods leading up to turning points.
4.The accuracy of Hotel Horizons® forecasts is somewhat inconsistent during periods following a turning point, which are typically unstable periods for the economy.
The following chart shows the average percentage point difference between forecast and actual change of five key variables (supply, demand, occupancy, average daily rate and RevPAR) at the national level during the aforementioned time periods.
Forecast vs Actual Performance – All U.S. Hotels
Implications for Budgeting
Other analyses conducted by PKF-HR have found that hotel managers also struggle to forecast during industry downturns. During the two most recent recessions, hotels have missed their budgeted revenue targets by 8 to 10 percent. Starting in the summer, most hotels will begin to prepare their budgets for 2011.
“As we proceed through the turning point of the current business cycle, U.S. hotel owners and operators are hoping for recovery to begin in 2011. Our forecasts for most markets indicate that these hopes are well founded. The lessons we have learned about forecasting during a turning point are outlined in the accuracy whitepaper and can be of great value to managers as they prepare their budgets for next year,” Woodworth said. “And fortunately, we now know that our forecasts are most accurate during this time in the cycle.”
To download a complimentary copy of the “Assessing Accuracy: Hotel Horizons® Forecasts” whitepaper, please visit www.pkf.com/accuracy.
* To learn more about PKF-HR’s Hotel Horizons® forecast reports, please visit www.hotelhorizons.com.
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