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U.S. Hotel Industry Poised for Return to Growth after Tough Three Years
Monday, 29 Jan, 2010
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San Diego, CA – The American Lodging and Investment Summit (“ALIS”) is the annual gathering of senior executives within the United States hotel and resort industry. At this year’s conference, held January 23-25 at the gleaming San Diego Bayfront Hilton, delegates ranged from CEOs of virtually every major hotel brand, hotel owners and developers, bankers to the lodging industry, Washington lobbyists, marketing gurus, hotel supply vendors and smiling, busy bankruptcy lawyers. This year’s aptly named conference theme was “Light at the End of the Tunnel”.
Virtually all in attendance acknowledged the brutal severity of the U.S. recession from 2007 through 2009. The North American hotel industry has been battered for three consecutive years, especially by a massive downturn in high yield business travel and that lucrative sector’s group, corporate meetings and incentive movements. However, positive signs for growth in advance group bookings, transient travel and inbound tourism indicate 2010 will result in higher occupancy and improved room rates by the third quarter. Public companies are starting to book incentive groups again for travel in 2011. The general economic outlook is for business travel and tourism to improve and that the bottom of the recession has now passed.
Mark Woodworth of PKF Hospitality Research addressed the conference citing research demonstrating that market performance is now stable again, supply of new room inventory is still growing despite the down market and predicting RevPar (“revenue per available room”) will grow by Q3. In contrast to this welcome economic news Woodworth also cautioned that “One in five hotel loans is now in delinquency”, and that a “51% cumulative value decline in hotel real estate since 2006” had occurred, indicating that an industry shakeout will continue through 2010, especially for properties with significant debt service acquired and financed between 2006 and 2008.
Arthur De Haast , CEO of Jones, Lang and La Salle Hotels commented on the lack of available credit in capital markets as banks, hit by the recession and bad loans, sit on the sidelines waiting for clear indications the market has improved. “Private equity is now the biggest source of investment funding, followed by REITs (real estate investment trusts). Asian investors are buying hotels in Europe and the U.S. west coast. In 2009 60% of Australian hotel transactions were from Asian capital due to a good economy, low interest rates and an availability of willing sellers” said Mr. De Haast, also stating “There is a lot of equity out there.”
A panel of major U.S. companies engaged in hotel ownership delivered a spirited discussion of the U.S. accommodation industry as it stands today. Gary Mendell, CEO of HEI Hotels said “Evaporation of demand was the biggest surprise in 2009, with average rate dropping far worse than previous recessions.” Jay Shah, CEO of Hersha Hospitality Trust, remarked that high U.S. unemployment was driving the downturn in business travel saying “Corporate transient decline in 2009 was fast and disorderly.” Mr. Shah also expressed optimism for 2010 as “there is pent up demand and positive signs in group bookings.”
Ed Walter, president of Host Hotels & Resorts, commented on uncertainty by business leaders in reading economic policy from Washington DC, saying “As a businessman you’re not sure what the rules are, hence there is less hiring and less investment. Political issues cause a lack of confidence.”
Tom Baltimore, president of RLJ Development, noted that the recent Democratic Party loss of Ted Kennedy’s Massachusetts senate seat “will force federal government policy to move more to center, with pro-growth policy to stimulate hiring. RevPar will follow.”
Echoing these political comments Mike Shannon, managing director of KSL Capital Partners stated that “the states will be the restructuring agent of the federal government, who has been holding the umbrella and saying it’s not raining. More pro-business policies will come if next year’s elections swing to the right.”
There was consensus about raising capital in the current environment, making acquisitions and/or acquiring debt of distressed properties in 2010 and beyond. Mr. Baltimore said RLJ Development will “be active in the debt space” and that “senior debt is also attractive, with $50 billion in debt maturing over the next three years, which will create opportunity.”
Mr. Shah of Hersha Hospitality Trust advised that “Institutional investors are optimistic about REITs. We’ve just raised $155 million in new capital, but lenders aren’t selling debt eagerly at an impaired value. However we are looking for core real estate in our (northeast USA) market.”
Each of the five CEO panelists predicted an increase in net room inventory for their company in 2010 and substantially improved U.S. economic conditions by 2011.
By Kieron Keady
Travelmole USA
Kieron Keady
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