A CNN Recession?

The Penn State Index of U.S. Hotel Values continues to project increasing hotel market values in the coming years. While the forecast of increasing values from this econometric model may seem counterintuitive considering all of the reports in the media about economic doldrums, it is based on the latest available economic data, which supports hotel values increasing in the future.

What about all of the reports of economic malaise? I recently met with the general manager of a large, upscale hotel located in a major metropolitan area, who concluded, “We're in a CNN recession.” While his occupancy rates are not increasing, they are near historical highs. His average daily rates are at all-time highs. After trimming the number of managers and other associates during and immediately after the 2001 recession, his property generates a healthy profit margin satisfying its owners. I think his experiences and viewpoint are relatively typical, with a few exceptions.

My personal experience is that the hotel companies that have historically come to Penn State to recruit our students for management and management training positions continue to come here and make numerous job offers. Similarly, our best students still graduate with multiple interesting job offers in hand, often all generated from on-campus recruiting visits. That situation was much different in 2001 and 2002, when even our best students needed to search wide and deep to harvest job opportunities. This year, hotel company recruiters have told me over and over how surprised they are that in their interviews, our students express so many concerns about the state of the economy and are worried about how it may affect their budding careers. The media have barraged people with talk of economic problems, and most people — my students included — are braced for the worst.

I've concluded I should do more to quell those fears — definitely for my students and maybe for others too.

There is a lot of noise in the media asking whether we'll be going into a recession, and some pundits have concluded we're already in one, but by the classic definition of a recession, we're not. The traditional measurement of a recession is two consecutive quarters of Gross Domestic Product (GDP) declines. That hasn't happened. Economic growth decelerated in the fourth quarter of 2007, but with a growth rate of 0.6 percent, it wasn't negative. While first-quarter 2008 GDP growth has been soft as consumers have limited discretionary spending, many expect improvements in the latter half of the year.

While the 2001 recession disproportionately affected hotels in major, gateway cities, and had less effect on drive-to destinations, that's not the case today. Increasing fuel prices are negatively affecting some hotels and markets, and particularly drive-to locations. At the same time, the weakening dollar (in March, the value of the dollar versus the Euro hit its all-time low in the nine-year history of the Euro) makes the U.S., and particularly its gateway cities, especially attractive travel destinations for foreign travelers, unlike in 2001 and 2002.

Hotel buyers continue to outnumber sellers, causing consistent upward pressure on hotel values. On the other hand, we expect a decline in hotel transactions this year, as the financing community, following its herd instincts, has tightened the thumb screws on its underwriting formulas, and has limited lending. Money is relatively cheap, but it's not as plentiful as it was a year ago.

Now, on to the specific projections of Penn State Index of U.S. Hotel Values. The Index projects that overall hotel values are expected to increase by 7.1 percent this year, following a 9.3-percent growth rate last year. Hotel values are expected to be aided by continuing increases in average daily rates, but curtailed somewhat by slight decreases in occupancy rates.

Though the expected 2008 increases in hotel values are less than in recent years, all hotel types are expected to achieve value increases. Luxury hotels are expected to register the largest dollar increases in value, increasing by approximately $25,000 per guest-room, while midscale hotels without food & beverage are expected to experience the largest percentage increases in value with a 9.5 percent increase this year. Value increases are expected to be positive, though slightly lower in 2009.

John W. O'Neill, MAI, CHE, Ph.D., is Managing Director of Hospitality Advisory Services, LLC, and Associate Professor in the School of Hospitality Management at The Pennsylvania State University. He can be reached at jwo3@psu.edu or 814-863-8984.

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