Adjusting to a Shifting Market
Lodging experts suggest times are getting tougher for hotels, even though increases in ADR are offsetting declines in occupancy. While that's true nationwide, the picture may be a tad darker in the South Atlantic, the only region in the U.S. to register a decrease in demand — a tenth of one percent — in 2007.
Even in the South Atlantic, which extends from Delaware to Florida, there's no definitive trend to hotel business. Some markets are thriving, like Charleston, SC, one of the only ones where residential prices are rising despite a nationwide housing slump. Others, like Norfolk, VA, aren't doing so well.
This checkered picture suggests a slowdown, borne by specifics such as 2.9-percent decreases in room supply in Miami during all of 2007 and in January alone, as well as a nationwide projection from Smith Travel Research of new supply outpacing new demand, with respective figures of 2.2 percent and 1.4 percent.
What that will add up to this year, says Jan Freitag, STR vice president, is a decrease in occupancy nationwide of 0.8 percent. What brightens that picture is the expectation that ADR will rise 5.8 percent, “well above the level of inflation,” he says.
“Much like the broader market, I'm not sure that anything's specifically different in the Southeast,” says Mit Shah, senior managing principal and chief executive officer of Noble Investments. “You find pockets of softness that are more of a result of individual business conditions than broad economic issues.”
For example, demand was “pretty flat” for the lodging industry in January, but rate was up and RevPAR was up nearly four percent.
“The Southeast has been generally susceptible to new growth,” says Shah. “It's an easy environment in which to develop hotels.
“What's happening is that healthy rate increases are offsetting flattening of demand and two-percent supply increases, which is a lot better than in past times, when we have had six-percent supply increases.”
Shah made his remarks before the release of a Commerce Department report in early March saying construction spending was down 1.7 percent in January, affecting homebuilding primarily but also touching on hotels.
For now, at least, the slowdown is just that, suggests one long-time observer.
“Last year was a fantastic year in the hotel business, with record profits, strong occupancies and lots of market growth in some places,” says Patrick Ford, president of Lodging Econometrics, a global lodging real estate specialist based in Portsmouth, NH. “There is some evidence that things began to slow down in December and January,” he adds, noting all talk of worry and concern is “future-looking.”
Nevertheless, there is “a modest slowdown,” Ford says. The cost of basics “going through the roof” means “fewer vacations and weekend getaways, less expensive vacations, more price sensitivity and less trading up,” Ford says. On the business side, expect “less commercial travel and less upgrade as companies take greater hold of their travel budgets and fewer people attend meetings and conferences.”
How these play out varies by market. Washington, DC, is both tourist and commercial; the Florida markets of Tampa-St. Petersburg and Orlando are primarily tourist; Miami and Norfolk are a bit of both; and Atlanta is primarily commercial, he says.
The overbuilding of condominiums is “massive” in Miami and notable in Orlando, Tampa and DC, Ford says. “That harms the local economy, which has some impact on local hotel business.”
Meanwhile, construction labor costs are down and the rate of cost increases for petroleum-based products like cement and asphalt is slowing. Mitigating those is a “lending crisis” in which local banks still advance money for midscale and upscale projects of less than 200 rooms but are “far more selective in terms of whom they term credit-worthy.” Large, city-center hotels, mixed-use facilities, destination resorts? The only ones coming online already have financing, Ford suggests. “Anybody that's under construction obviously has money.”
“Occupancies began to go slightly negative in October, and that's continued through January and February,” says George Brennan, executive vice president of sales and marketing, Interstate Hotels & Resorts. Gateway cities like Miami and New York still do well, and while international travel to the U.S. declined in the last few years, when the domestic industry itself posted record profits, it's begun to come back, thanks to the weak dollar.
STARRING THE SUNBELT
“We're doing fine,” says Bill Talbert, president and CEO of the Greater Miami Convention & Visitors Bureau. A recent decline in occupancy in the area is temporary, he maintains, noting that in 2007 12 million tourists — a record — visited Miami, 46 percent of them international.
Meanwhile, the condo-hotel boom of 2005 and 2006 is over, he says. “The condo-hotel concept was really a financing technique, and to the extent that I've now got a Four Seasons and a Conrad hotel here because of that model, it was good. But right now, we're pretty much back to straight hotels.”
The Four Seasons Hotel Miami opened in 2003. The Conrad Miami opened in 2004.
Talbert says Miami is a global destination benefiting from the weak dollar and the high-value customer. “The customer that stays in a five-star hotel hasn't really been roughed up. They seem to make money on the way up and the way down.”
For an even rosier outlook, consider the Charlotte area. Last year, says Michael Applegate, meetings business in the South Carolina metroplex of 1.6 million was up 30 percent over 2006. Nevertheless, cautions the market researcher for the Charlotte Regional Visitors Authority, the CRVA has to “keep an eye on what the general economic slowdown might mean to corporate travel in general.”
In 2007, occupancy was 65.8 percent across all Charlotte-area hotel segments, a decline of one percent from the year before, while ADR was up 11 percent; it hit $83.61 in January.
The view is especially good from the recently renovated Hilton Charlotte Center City downtown. “From a corporate business travel perspective, having world headquarters for the Bank of America and Wachovia helps enormously,” says Greg Greenawalt, sales director. “Not only do you have bank travelers coming in from all over the world, you also have the big four accounting firms, so Monday through Thursday business travel continues to increase. Most of the city-center hotels run high-80s to mid-90s occupancies on Tuesday and Wednesday nights.”
Leisure travel, too, is growing, suggests Greenawalt, citing the NASCAR Hall of Fame and Epicenter office tower under construction, the U.S. Whitewater Rafting Center, and “sporting events between the Panthers, the Bobcats and NASCAR racing.” The Bobcats Arena is home to Charlotte's NBA team.
“As we speak today,” Greenawalt said in late February, “we have 27 high-rise cranes just in the downtown inner circle area.”
THE NEAR HORIZON
Demand could remain robust for hotels in the Southeast, at least this year. Says Noble Investments' Shah: “Boomers are going to continue to travel for leisure, and it's an election year.” Politics-based business, combined with “pretty intelligent revenue management that our industry has learned over the past six years,” guard “against a deeper erosion of RevPAR,” he says.
And what does Interstate EVP Brennan foresee for the near future? More daylight and warmth and a healthy outlook, thanks to the recent passage of a federal economic stimulus plan that means $600 checks for individuals and $1,200 checks for families. “That $600 buys a hell of a lot of weekends,” he says. “$1,200 for a couple? If just one of 10 takes a trip, that's an enormous amount of demand.”
THE BIG IDEAS
Cultivate your local bank
Personal connections with a local banker could help developers seeking to build a modest midscale or upscale hotel.
Capitalize on deals
If you can get the money to build a hotel, you should be able to secure labor and materials at reasonable cost.
Cultivate your local market
Use your CVB or marketing association, as Charlotte and Miami do, to draw travelers — especially people from countries with strong currencies — to your destination.
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