Hotel sector stable: Ernst & Young

By Deena Beasley

LOS ANGELES (Reuters) - As new hotels open and demand grows more moderately, the U.S. lodging sector will stabilize in 2007, although a healthy business economy should still underpin expansion, consulting firm Ernst & Young said in a report released on Monday.

The supply of U.S. hotel rooms is expected to increase by 2.5 percent this year, compared with 1.8 percent in 2006, according to Lodging Econometrics.

"The nation's lodging markets, most of which are past their post-9/11 recovery phase, are absorbing the additional supply. Nonetheless, the economic conditions in 2007 may lead to more moderate lodging demand," Mike Straneva, head of Ernst & Young's real estate transactions group, said in the report released at the beginning of the Reuters Hotels and Casinos Summit 2007 in Los Angeles.

Revenue per available room, a key measure of hotel financial performance known as revpar, rose 7.4 percent last year despite only marginal growth in room occupancy, according to Smith Travel Research.

"2006 lived up to expectations ... so far for 2007, the crystal ball shows revpar continuing to substantially outpace inflation, although below the gains of 2006," Straneva said at the summit.

The exact trend will depend on U.S. economic growth, he said. Revpar growth is being driven by room rates rather than occupancy, which has started to slip, but Straneva said much of that is due to sophisticated yield management on the part of hotels.

"It's all about selling the right rooms to the right groups," Straneva said.

He acknowledged that there could be some push-back from consumers as prices continue to rise, which is one of the reasons U.S. hotel operators are placing more emphasis on international expansion.

"That's a huge deal right now ... how are they going to launch limited-service hotels in other markets?" the consultant said.

Hotel buyers, sellers and lenders continue to be active, and the sector continues to attract both traditional developers and those new to the industry, the report said.

"Nevertheless, while the potential for strong operating margins and high transaction prices are appealing, hotel developers are facing a trend of rising construction costs," Straneva said.

Another trend that has helped constrain the supply of new hotel rooms -- conversion of hotels to condominiums -- has likely reached its "tail end" as the U.S. housing market cools, the consultant said.

"That's a trend that tends to be short and quick ... because lead times are so great," Straneva said.

Construction costs rose an estimated 5 percent in 2006, while some materials, including steel and concrete, experienced double-digit price increases.

That means profit margins on new hotels and even renovation projects have shrunk, leading developers instead to build mixed-use developments and condominium-hotels, the report said.

Straneva said he expects international demand for construction materials to keep prices on the rise in 2007, but that a cooling U.S. housing market should help dampen construction labor costs.