US Hotels: the Worst Is Yet to Come

Posted On Wednesday, 01 July 2009 02:00 Published by
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Since the late 1980's hotel occupancy rates have been on a downward trend and the most recent recession is expected to force occupancy rates in both sectors to a new low

Why is this? The recession in the early 1990's caused some weakness in occupancy (about a 300 bps loss) but the combination of a recession and the terrorist attacks on September 11th proved to be the straw that broke the camel's back with up to 9 percent peak-to-trough declines in occupancy. We will compare the effects from the two most recent recessions as well as the current one (thus far) on hotel demand and occupancy.
Contrasting growth in GDP with growth in hotel demand reveals a strong relation between the two over time. In the 2001 recession, GDP growth matched that of the 1990/1991 recession, but GDP growth had suffered significant deceleration in the quarters leading up to the 2001 recession which meant that demand declines were not far behind. For the current recession, up until 2008q4 the deterioration of GDP growth was not as rigorous, but over the past two quarters GDP growth has declined so significantly, placing it in uncharted territory compared to the other two recessions. Due to the magnitude of the deceleration of GDP, demand growth declines are expected to continue. The overall severity of this recession from an economic standpoint is already more severe than the two previous recessions.

The hotel industry was facing different challenges leading up to this recession as compared to 2001. A major challenge for the hotel industry leading up to the 2001 downturn was limited-service new supply additions. Coming out of the 1990/1991 recession new limited-service room additions gained momentum with each passing year. By 1999, the amount of rooms being added had hit a new peak in our history. This over-supply weakened limited-service occupancy rates forcing them below their recovery rate following the 1990/1991 recession. Leading up to the current recession demand growth was weaker in both service sectors. The weakening of demand began in 2006 as the housing crisis got underway. This placed both full-service and limited-service hotels in an already weakened state once the recession hit. During the start of the housing crisis not all hotels were suffering due to the pull back in consumer spending. The dollar reached new lows at this time, so international tourism picked up and some hotels (mainly full-service hotels) saw an increase in occupancy in the heavily traveled cities, such as New York and Boston.

In the first three quarters of the 2001 recession hotel occupancy rates suffered major declines in both the full-service and limited-service sectors. The drop was not as dramatic in the first two quarters of the current recession, meaning that the recession had more of an immediate impact on hotels in 2001 and a delayed impact on hotels in the current recession. The magnitudes of the initial drops in occupancy rates once the recession began (both sectors) were much more severe in the 2001 recession. The severity of the recessions in their early stages most likely contributed to this. The downward trend in occupancy rates formed just as early in the current recession, but there wasn't a bump up in occupancy rates like there was in 2000 due to consumers feeling nervous about spending once the housing crisis began. While occupancy rates were not as dramatically hit at the beginning of the current recession as in the last downturn, there is now plenty of room for them to decline this year.

There are several factors which contributed to both downturns besides the economic impacts. After the terrorist attacks on the World Trade Center on 9/11 the airline industry grounded planes and a fear of flying, which kept many people at home, developed. Hotel occupancy suffered because of this and forced occupancy rates to the lowest levels in our history. Just as in the previous recession, the full-service sector is going to have to contend with an abundance of supply additions in 2009. Looking at the projects underway in our TWR/Dodge Pipeline product we can see that like the 2001 downturn with the wealth of limited-service completions, the recovery will be impacted by the amount of projects being delivered in the full-service sector in 2009.

We feel that the severity of the downturn in the hotel industry will continue through the end of 2009. As the year progresses, occupancy declines should lessen because the rooms demanded by consumers and businesses will reach the bottom; trending with GDP growth. By the end of 2009, occupancy rates are expected to bottom out at around 60% in the full-service sector and 57% in the limited-service sector. The recovery is expected to begin in 2010 with demand for rooms turning positive, and as in previous recoveries the limited-service sector will lag the full-service sector by a couple of quarters as consumers struggle to justify spending money on leisure travel.

So, what does this mean for hotel investors and or those looking to invest in hotels? Within the limited-service sector, looking at changes to RevPAR over the past two quarters, the midscale without food and beverage and the economy segments are proving to be the most resilient. These segments are able to offer lower rates during these challenging times; enticing more travelers, whether they are business or leisure, to their hotels. This trend is likely to continue while the economy remains fragile.

Publisher: eProp
Source: TWR

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