Heaven in '11?

Analysts debate length, depth of downturn.

Nearly everyone agrees 2009 will be a difficult year for the hotel business

But industry analysts are divided on several other crucial questions: How long will the downturn last? How low will key operating indicators continue to fall? What will be the effect of the credit crisis on lodging acquisitions and development?

Unlike previous industry downturns, such as the most recent one in 2000-02, falling demand and its effect on occupancy are the primary symptoms of the current problem. In the last recession, which encompassed the post-9/11 period, leisure travel remained relatively firm while business travel softened. Also, panicky hotel executives turned to third-party Internet sites to sell excess rooms at severely discounted rates.

This time, with mounting job losses in many industries, consumer confidence flagging and reduced air service to many resort destinations, vacation travel is down. Of course, reductions in employment have also reduced business travel. The good news is owners and operators are generally holding their rates and using value-added perks rather than naked discounting to capture market share. And, most importantly, nearly all chains have lowest-rate guarantees that result in rate parity no matter what reservations channel a traveler uses to book rooms.

For developers and those looking to acquire hotels, credit has nearly evaporated, whereas in previous times of crisis, credit was available but rationed. Today, it's extremely difficult for borrowers — even those with excellent track records — to get financing for acquisitions or development of new hotel properties.



The drop in hotel demand began last fall: Occupancies in October were down more than six percent and 12 percent in November, according to Smith Travel Research numbers. According to the firm, occupancy fell four straight quarters through the third quarter of last year and dropped seven out of the nine previous three-month periods. (While final numbers haven't been published yet, it's very likely occupancy was down in the fourth quarter of 2008 versus the same period a year earlier.)

STR and PKF Hospitality Research have significantly different opinions on how far demand and occupancy will fall this year. Smith Travel forecasts a 1.0-percent drop in demand and a 3.5-percent decrease in occupancies over last year. PricewaterhouseCoopers agrees, forecasting a 3.6-percent decline in occupancy, while PKF is more pessimistic, calling for declines in demand of 2.5 percent and occupancy of 5.3 percent.


STR believes rates will rise this year by 1.0 percent, while PKF (down 2.7 percent) and PwC (down 2.4 percent) forecast falling rates.


All three firms predict a decrease in RevPAR in 2009, but the projections vary wildly. On one end, PKF sees a 7.8-percent decline, while STR says RevPAR will fall by 2.5 percent. In the middle is PwC, which is calling for a 5.8-percent decline. Should PKF's projection come true, 2009 will have the fifth-steepest decline in annual RevPAR in the history of the hotel business.

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