Damage to Hotel Fundamentals Contained?

Hotel investors have been waiting for the proverbial 'other shoe' to drop on the fundamentals of the U.S. lodging sector for some time now, and with the release of Smith Travel Research's latest forecast it seems that 'other shoe' is hitting the ground hard. For the month of September STR reports industry-wide RevPAR (Revenue Per Available Room) is down 2-4% year-over-year, with the lower end of the market being hit hardest as consumers feel the economic pinch. STR is projecting a meager RevPAR increase of 0.4% for all of 2008, which would be even worse if not for stronger performance early in the year. Going forward, STR projects RevPAR will decline by 2.5% in 2009 driven by declining occupancy rates that will continue through 2010 before bottoming out at 58.7%.

Until the economic upheaval of the past two months went global, international tourism was helping to prop-up hotel fundamentals in many markets. The weak dollar was attracting European, Asian, and Middle Eastern visitors to New York, L.A., Vegas, Chicago, San Francisco, and Miami. But now the dollar is strengthening, making visiting the U.S. more expensive, and even wealthy tourists are being hit by declining worldwide stock markets and rampant uncertainty. International tourist magnet New York City is seeing a decline in bookings going forward and is preparing for a weak holiday tourist season. This despite the fact that many analysts had predicted New York would act as a 'value alternative' to a European vacation for many U.S. travelers.

On the bright side, overbuilding appears to be contained and the tight credit markets should keep new supply in check for the foreseeable future. Few new hotel development projects are coming out of the ground right now and deliveries of new rooms should slow to a crawl as we get into 2009. There could be another six to twelve months of very tight financing for hotel construction, keeping construction starts to a minimum in all but the economy sector, and allowing us to come of out of the current downturn with a relatively healthy supply-demand balance, leading to a faster recovery. Only select markets with unique growth stories will see significant new development over the next year, but developers with deep pockets should find plenty of opportunities for bargain purchases, repositionings, and bailouts of weaker operators.

Llenrock Group