Will We Be Fine til 09?

To reverse a quote by Fed Chairman Alan Greenspan, it's a time of rational exuberance in the lodging industry. Judging from the smiles on the 1,700 faces at last month's New York University Hospitality Industry Investment Conference in New York City, the hotel business has two or three — or even more — years of prosperity ahead. However, despite the widespread euphoria and generally positive economic signposts, the industry must take care to prevent this rationality from turning into irrationality.

As it usually does, the conference yielded several definable trends that should inform the industry for the coming few years:

  • More than one speaker, including typically conservative numbers guru Randy Smith, believes the industry will approach or break the performance records achieved in the late 1990s and culminating in 2000.

    Smith, chairman of Smith Travel Research, told the crowd that while 2005 will be a great year for the business in terms of sales, RevPAR, occupancy and profits, '06 will be even better, with occupancy hitting 65 percent and combined industry revenues topping the $22-billion mark achieved in '00.

  • New hotel openings, especially in the short term and especially in the upscale and luxury segments, will continue to lag, at least until 2008 or later. Not much new construction is under way, and it takes four or five years, at minimum, to develop large urban and resort properties. And while the market for acquisitions of existing lodging properties remains brisk, prices are still generally below the cost of building new.

    This phenomenon won't last long, however. Hotel developers have an uncanny knack of finding ways to build new hotels, either as pure new-builds or as conversions of other kinds of real estate or in the case of resorts, as part of mixed-use projects.

  • Levels of merger and acquisition activity are still strong in the real estate side of the business. Single properties and portfolios of hotels change hands daily. And while several speakers doubted whether many brand companies will change ownership in the coming year, just a week after the conference The Blackstone Group announced its $3.24-billion acquisition of Wyndham.

  • Alternative lodging types — everything from straight timeshare to fractionals to destination clubs — were the hot new topic at the conference. The economics speak for themselves: Timesharing continues to grow in sales by 15 to 20 percent a year, yet just six percent of households with annual incomes above $50,000 have purchased a vacation ownership product.

Timeshare researcher Dick Ragatz sounded a note of caution about the rapidly growing destination club segment. He believes one of these lightly regulated firms could go belly up in the next six to 12 months, creating a flood of bad PR that could taint the improving, but still fragile, public perception of resort ownership in all of its forms.

Despite the broad smiles and custom-made suits on most of the conference attendees, it's important to remember that ours is a cyclical industry that is ultimately controlled by many factors — the state of the economy, global politics, the health of the transportation infrastructure and booms and busts in other industries (e.g., technology) — that are totally outside of our control.

Many less-giddy industry observers worry, for example, that the bubbling U.S. real estate boom may ultimately burst with a cascading effect on the health of the lodging industry. And while it may be true that, as one speaker predicted, “we'll be fine ‘til '09,” there are no guarantees, so it's important to plan for a less-optimistic future for the business.

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