Following a very strong 2000, the Boston Cambridge lodging market remains one of the top performing in the nation. According to the year-end Pinnacle Perspective report, the market finished with an occupancy level of 78.5 percent at an average rate of $199.50. As expected, a strong convention year resulted in record occupancy and room rates for the market. In fact, demand was significantly stronger than originally estimated and new supply was easily absorbed, allowing market occupancy to increase by more than three points. The strong demand for rooms allowed operators to increase rates by 6.2 percent over the 1999 level.
A review of the market's performance on a monthly basis indicates that occupancy levels were up 10 of the 12 months in 2000. The only declines occurred in October when market occupancy declined from 89.7 percent to 88.8 percent and in and November when occupancy levels declined from 78.6 percent to 77.4 percent. The largest increases in occupancy occurred in May when the market finished 7.8 points higher than the previous year at 79.2 percent and in April when the market finished up 6.5 points over the previous year at 84.0 percent.
The Boston Cambridge market's increase in occupancy was led by the properties outside of the two central business districts. This market area (categorized as "Other" in the Pinnacle Perspective), which in 1999 dropped nearly 10 points in occupancy, experienced an 18.3 percent increase in demand lifting its occupancy from 69.8 percent to 75.5 percent in 2000. The Back Bay market, which in 1999 lost nearly five occupancy points due to the decline in convention demand, grew from 74.9 percent to 78.7 percent. The downtown market, which experienced the largest increase in supply in 2000 gained more than three occupancy points increasing from 75.5 percent to 78.9 percent as the Hilton at Logan Airport and the Wyndham Boston were absorbed into the market.
Demand in the Boston Cambridge market grew by 8.9 percent in 2000 compared with only 4.1 percent in 1999. The largest increase in demand occurred in the "Other" market area, which absorbed new supply and benefited from strong overflow demand from the central business district. Due to a lack of new supply, Cambridge saw demand increase by only 2.8 percent compared to an increase of 8.6 percent in 2000.
While average room rate growth continued to outpace inflation, the rate of growth continued to decline, increasing by 6.2 percent in 2000 compared to 6.6 percent in 1999, and 8.9 percent in 1998. In 2000, the months that experienced the strongest growth were May and October when rates were 9.8 and 10.0 percent above the prior year respectively. Not surprisingly, the average rate in September declined by 1.6 percent after an increase of more than 20 percent in 1999 due to the effect of the Ryder Cup. Perhaps the most publicized event in 2000, the Tall Ships, in July, had a fairly significant impact on average room rate (an increase of 9.7 percent but occupancy grew by only one point).
A review of the four market areas defined in the Pinnacle Perspective reveals that the Downtown (Boston) market achieved the strongest growth in average rate increasing by 7.4 percent to $203.43, but it was followed closely by the "Other" market which grew by 7.1 percent from $105.80 to $113.32 and the Cambridge market that grew by 7.0 percent from $183.97 to $196.79. The Back Bay market grew by only 5.3 percent, compared to 7.1 percent in 1999.
Based on our research into projected supply and demand patterns for 2001, we believe that a decline in citywide conventions will negatively affect demand, however, new supply is not expected to be an issue. Specifically, while transient corporate and leisure demand is expected to remain strong in 2001, a significant drop in the number of citywide conventions and the number of room nights associated with those conventions is expected to have a negative impact on the city as a whole. Fortunately, however, most of the largest hotels in the city had anticipated the decline and were able to replace much of the convention demand with corporate groups. In addition, the market will benefit from only a minor increase in supply, and even that will be largely mitigated by renovations that will take a significant number of rooms out of inventory. Overall, due to the projected decline in demand we are projecting the Boston Cambridge market occupancy to decline by two points from 2000. While average rate growth is projected to outpace inflation in 2001 it is expected to continue its decline and grow by only five percent compared to an increase of 6.2 percent in 2000.
Pinnacle Advisory Group is a national hospitality-consulting firm with offices in Boston, Philadelphia, Portland, Houston and the Gulf Coast. The firm specializes in appraisals, asset management and consulting.
For more information or to subscribe to the Pinnacle Perspective please call 617-722-9916 or e-mail takin@pinnacle-advisory.com.
