Did We Dodge the Bullet?

A question on the the minds of many people in our business is what effect will the recent meltdown in the sub-prime lending market, as well as the shaky stock market, have on the lodging industry. Will capital still be available to buy and build hotels? Will a slowdown in the general economy put the brakes on the occupancy and rate gains most markets, segments and properties have enjoyed for the past several years?

To get an answer, I turned to Matt Valley, editor of National Real Estate Investor, a sister publication at Penton Media. If you're involved in the investment, development or financing sides of the lodging business, you should also be a reader of NREI, a leading information source for all commercial real estate. Check it out at www.nreionline.com.

Matt believes that many of the investors in mortgage-backed securities have taken losses on the residential side, “which is affecting their bottom lines and investment decisions on the commercial side. Some of it is overreaction.” He actually believes the underlying fundamentals for commercial real estate are stronger now than when cheap debt was readily available and everyone was buying on the greater-fool theory, i.e., buy now and sell it to someone else down the road.

To be sure, the nervousness over real estate in general, and residential mortgages and foreclosures in particular, may actually be a blessing for the hotel industry. New hotel construction is beginning to heat up in many markets, and the recent jittery news about real estate, albeit residential real estate, should further put the brakes on some hotel development. As Matt says, “Provided we don't go into a full-blown recession in which consumers stop spending because of the trickle-down effect of this whole mortgage securities blow-up, the hotel market will actually benefit because supply will be contained.”

Contained but not eliminated is the key concept. Well-located, adequately funded projects submitted by experienced developers with solid franchises in their pockets will always get the financing they need. Whereas the mortgage melt-down was a national phenomenon (and actually a small part of the overall residential mortgage business), hotel financing is still largely a localized activity. For the most part, hotels get built by local developers who get loans from local banks with whom they've done business for years.

Other factors are at work, such as higher construction costs, or at least the perception of high costs. In our report in this issue on extended-stay hotels (pg. 58), we show how construction in that segment is taking longer than during previous market cycles. According to Mark Skinner of The Highland Group, construction pricing often increases between the time a developer plans a property and work begins on it. The hotels generally still get built, but the team must go back to the drawing board to reconfigure the plans, the cost estimates or the sources of financing.

Barring more catastrophic news, the sub-prime fiasco should have little long-term effect on either the development or operation of hotels. Hotel developers and owners, who have become much more sophisticated in the past 20 years, can differentiate between the real issues facing their businesses and the ones that are other peoples' problems.

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