Kick Off!

Top hotel execs share their playbooks for success in tough times.

Perhaps Wyndham Hotels & Resorts President Peter Strebel said it best: “Rough waters make good sailors.” That was the generally hopeful tone struck during a recent panel discussion among 10 hospitality industry leaders. While the executives acknowledged the tough times facing the hotel industry in 2009, they preferred to focus on the opportunities the downturn presents, as well as the strategies owners and operators can embrace to survive and thrive.

Lodging Hospitality hosted the 90-minute discussion at the Omni Berkshire Place Hotel in New York City during the International Hotel/Motel & Restaurant Show in November. The panel included presidents and CEOs from a cross-section of the hospitality industry: brands, management companies, owners, lenders and consultants.

“In every crisis there is opportunity,” said David Kong, president & CEO of Best Western. “The airlines make you pay extra for your bags, your soft drinks and your movies. No wonder it's one of the most-hated industries. That's why it's important the hotel industry does an even better job with customer care than it has in the past. There is such a void that if we do a good job we can really stand out.”

Even in this constricted real estate lending environment, the leaders found silver linings. Citing the history of previous downturns, Simon Turner of Starwood believes the current financing freeze will eventually thaw and dealmaking will resume.

“One of the things that has always amazed me about the U.S. capital markets has been their incredible creativity and inventiveness,” said Turner, who heads global development for the brand company. “At some point, a pool of capital will form to take advantage of the wave of CMBS (commercial mortgage-backed securities) refinancings that will hit in 2010.”

While Loews Hotels President Jack Adler believes the hotel industry is facing “a huge IOU when the CMBS loans come due,” the good news is most of them don't mature until next year or 2011. “We're lucky it's not this year, when the basic dynamics of supply and demand aren't favorable,” said Adler. “Hopefully, we will have recovered by the time they come due.”

Sean Hennessey of Lodging Investment Advisors likens the current situation to the industry downturn of 1990-92. At that time, the hotel industry lost the insurance companies as its primary providers of long-term capital.

“Now we have a situation in which the CMBS market, which had been a major capital provider to the hotel industry, is essentially out of business,” he said. “It's going to take quite a while for that market to come back or for a new source of capital to replace it.”

Financing for acquisitions and new projects will continue to be difficult, but not impossible, the executives believe. They all stressed the importance of relationship lending and sensible development.

“Right now, financing is as difficult as I ever remember,” said Joe Epstein of First American Realty. “The one shot you have is on a local or regional basis. If you're lucky enough to have a good deal in a good market, where there is a demand and a need in that segment, and you have banks that have money and haven't been affected, then a deal can still get done.”

Those in the mid-market segment, as represented on the panel by Steve Joyce of Choice, Joe Martin of Stillwater Hospitality and Kong of Best Western, believe projects under $10 million can get financed, but as Martin said, “these deals are going to have to make sense in order to get financed.”

Another silver lining mentioned by panelists was the slowing of the construction pipeline. As Mike Marshall of Marshall Management pointed out, before the recent downturn overbuilding had become a serious problem in some markets.

“We're in a lot of secondary and tertiary markets where 50 percent more rooms were added to the market in the past two or three years,” he said. “There just aren't enough slices of the pie to go around to fill those rooms, and a lot of those properties that opened won't make it.”

Now signs point to a much slower new construction cycle. In fact, last month Smith Travel Research reported the number of abandoned guestrooms in the U.S. construction pipeline increased by 75 percent in November over the same month in 2007. While the total pipeline increased by 6.7 percent, the number of rooms in active construction dipped by 6.8 percent. In all stages of the pipeline — from pre-planning to construction — more than 90,000 are no longer under development.

“That's the good news,” said Wyndham's Strebel. “A lot of projects will be put on the back burner, which will provide some time for demand to catch up with supply.”

Joyce, who was named to the top job at Choice Hotels last year, was even more specific: “We (the brands) all boast about our record pipelines, but ask us how many of those projects have started construction. Twenty-three percent of ours in the pipeline have started, but I'm not so sure after that. We'll see some elongation of those deals or even some fallout.”

Overall, the panel was upbeat on the prospects of a return to good times for the business. Epstein, for example, is optimistic that financing will return to the industry.

“Lenders lend, and that's what makes the world go round,” he said. “I'm optimistic that in the middle to the end of the year the flow of money will absolutely start again. It's not going to be like it was during the easy money era that just ended, but you're going to see measured, smart lending, which will be terrific for everybody.”

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