Still Great in '08

Like it or not, the fate of the U.S. hotel industry has always been, and probably always will be, tied to the U.S. economy. Even when the industry occasionally tries to self-destruct through overbuilding, it's the health of the overall economy that ultimately controls its success. It's not surprising, then, that many in the industry wonder what's ahead for hospitality in light of the economic warning signs that have surfaced in recent months.

While the big concern is an economic recession, Cornell University Professor Jack Corgel doesn't think it will happen. At a recent Cornell School of Hotel Administration panel discussion in New York City, he says the likelihood of a recession is “only between 20 and 40 percent.

“The economy is still strong and we're seeing essentially no delinquencies or defaults on hotel loans,” he told the audience of hotel leaders. “As long as the economy holds up, I would expect to see continued growth in RevPAR.”

Of course, one concern is the effect the ongoing sub-prime lending crisis will have on the economy in general and consumer spending specifically. Despite recent measures by the federal government to mitigate the crisis, interest rates on nearly $350 billion in loans will be reset this year, creating economic pain for many consumers and cramping their discretionary spending on things like travel.

The sub-prime debacle has also had a profound effect on the volume and terms of financing available to real estate, including hotels. Speaking on the same panel as Corgel, Alan Kanders of Lehman Brothers said, “We're waiting to see where pension funds and insurance companies will put their capital in the first quarter. Since the sub-prime turmoil, credit spreads on commercial real estate securities have widened considerably. There's some illiquidity in the hotel lending market that needs to be filled.”

BY THE NUMBERS

Despite the uncertainties, most forecasters believe 2008 will be another great year for the hotel industry, not as great as the past three years, but very promising for all sectors of the market. Of the two primary forecasting firms — Smith Travel Research and PKF Hospitality Research — STR is slightly more bullish on business this year.

According to Smith, increases in supply and demand will reach equilibrium this year (both up by two percent), yielding no change in occupancy. Rates, however, will rise by 5.2 percent (versus 6.0 percent last year and 7.2 percent in 2006). The percentage rise in RevPAR will match the increase in rates.

In PKF's view, supply increases will be a problem this year. According to its data, 115,000 new rooms will enter the market for a 2.6-percent hike in supply. Demand will increase by 1.8 percent, causing a slight downturn (-0.7 percent) in occupancy. Combined with a 5.3-percent rise in rates, industrywide RevPAR should jump by 4.5 percent, according to PKF.

According to supply analyst Lodging Econometrics, at the end of last October the hotel construction pipeline in the U.S. topped 5,000 properties and 650,000 rooms, a new record. Four of the biggest hotel companies — Marriott, InterContinental Hotels Group, Hilton and Starwood — accounted for more than half of the rooms in the pipeline.

At the time of the report, more than 3,800 hotels with nearly 500,000 rooms were either under construction or scheduled to start construction in the following 12 months.

The development rush is particularly acute in several high-profile markets. Las Vegas will add 40,000 hotel rooms by 2009, bringing its inventory to more than 175,000 units, or enough to accommodate everyone living in the state of Wyoming, assuming they're housed three to a room.

In New York City, 59 hotels with 8,500 rooms are under construction, many of them in the outer boroughs, particularly Brooklyn. It took the nine previous years (1998 to 2007) to achieve this same 10-percent increase in supply. The boost in room count should cool off the unprecedented rate levels in Manhattan (above $300 on average and up to $1,000 a night at the Four Seasons) without denting the market's high occupancy levels (about 85 percent year-round).

In Atlanta, a dozen new hotels are in the pipeline. The new properties will add 3,200 rooms to the inventory.

TRENDS TO WATCH

A number of macro- and micro-trends will guide the hotel industry this year and beyond:

  • The falling value of the U.S. dollar should boost international tourism to the country, both from Europeans and Asians, but also from Canadians. The image of the U.S. as hostile to foreigners could dampen this potentially lucrative trend.

  • While few hotel owners seem to be in danger of default on their loans, the future is less certain. As Professor Dan Quan remarked at the Cornell panel discussion in New York, “While we have been in a very favorable period for hotel lending, historically some of the worst loans are made during the best times.

    “Indeed, there is concern about the underwriting standards in place today,” he said. “Even small disruptions can send poorly written loans into delinquency and default.”

  • The turmoil in the capital markets may mean fewer hotel transactions and mergers & acquisitions in ‘08. According to Jones Lang LaSalle Hotels, transactions volume set a record in '07, topping $45 billion. Half of the activity came in nine separate megadeals of $600 million or more.

  • The failure of Congress to pass the H-2B returning workers extension could cripple the ability of some properties — notably resorts — to fully staff their operations. Passage of the extension would have allowed immigrant seasonal workers to return to work under their previous year's visa. Only 33,000 new slots open annually, and they were all filled quickly this year, leaving many seasonal resorts with severe staffing shortfalls.

  • In late December, Congress passed a measure protecting 20 million households from the alternative minimum tax provisions of the IRS code. Unfortunately, the late action means a potential delay of up to $40 billion in tax refunds, a lot of which would have been used for discretionary spending, such as on winter vacations.

  • The news wasn't all bad out of Washington last year, and the tourism industry may be able to capitalize on its newly found respect among lawmakers. In '07, Congress passed legislation that expands the visa waiver program, speeds-up the visa process, strengthens the US-VISIT program and adds 200 new U.S. Customs and Border Protection officers. The ambitious goal this year is Congressional passage of the Travel Promotion Act.

  • The momentum toward green hotel construction and operation should move forward. More than one-fourth of respondents to a TripAdvisor poll say they will be more environmentally conscious in their travel decisions this year. In another survey, 21 percent of travelers say they would pay more for environmentally friendly hotels and other travel products.

  • The new crop of lifestyle brands (aloft, Cambria Suites, Hyatt Place, Indigo, NYLO) will begin to blossom this year. Some units are open, but many brands will debut their first properties in ‘08. According to Lodging Econometrics, more than 200 lifestyle properties are in some stage of the construction pipeline.

  • Few new brands will probably emerge in the next few years, following a three-year period in which, according to PricewaterhouseCoopers, 34 new lodging brands were introduced in the U.S.

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