A Change Wave Is On the Way

Call it a hunch, an educated guess or an appreciation of history, but I believe the lodging industry is on the cusp of major shifts in its performance, direction and centers of power. The market's current characteristics — rising rates and occupancies, restrained development and frenzied buying and selling of assets — have been in place for nearly three years, a lifetime in the market cycle of any industry, let alone one as volatile as lodging.

While the changes ahead won't necessarily be harmful to everyone, as in any market dynamic, some players will fare better than others. So whether you're an owner or operator, it's important to pay attention to shifting trends to determine how you can capitalize on the new environment.

I believe three forces will precipitate the coming changes:

The buying frenzy cools

Capital, and lots of it, has been chasing hotel industry deals for the past few years. For the most part, there's more interest among buyers than there is product available, resulting in quickly rising prices.

Once prices approach levels where potential buyers can no longer see a way to make quick and substantial returns on their investments, capital will begin to flee from the market. It isn't a faucet that can be turned off in one turn of the wrist, but once the trend reverses, a lot of money people — especially those who don't exclusively invest in lodging — will begin to look for other places to invest their dough.

As HVS International President Steve Rushmore is quoted in our annual lender survey story this month (beginning on page 36), the best time to sell your hotel, if that's your plan, is in the next six to 12 months. Beyond that timeframe, industry capital will be looking at a new home — development.

Building, but not overbuilding

The robust hotel transactions market has, for the most part, made lodging development the second-best way to deploy capital. If Rushmore's predictions hold true that may begin to change in 2007 and beyond.

The good news is that the threat of overbuilding is still years away, at least in most markets and for most types of properties, especially full-service, big-box convention hotels that take years to conceive, design, build and open.

Once building returns in earnest, much of it will be centered on the new wave of lifestyle brands introduced in the past year or so. Later this year and into '07, we'll begin to see the debut of select-service properties aimed at Gen X travelers under flags like aloft, Cambria Suites, Hyatt Place, NYLO and others.

Condo complications

The hottest trend in many markets has been the condo hotel, that hybrid of whole-ownership residence and hotel facility that can prove to be an effective financing vehicle for developers. However, it's not a product for every market and circumstances, and it's fraught with so many regulations, nuances and legalities that few developers really understand the minefield they must navigate to bring a project to market. Also, a number of communities are beginning to craft legislation that will hamper or even inhibit development of these projects.

The condo hotel is a great product, but it's not right for every situation, so be sure you do extensive due diligence and apply a healthy dose of common sense before you jump into this pond. If you don't, alligators may be waiting for you.

On a related note, as the property transactions market continues to percolate, a new service from Lodging Hospitality can help you in either the buying or selling process. Go to www.LHonline.com/realestate to see an extensive and detailed listing of lodging properties for sale in the U.S. and around the world.

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