Will hotel supply and demand levels ever return?

April 18, 2010

In an article written for Hotel & Motel Management, Senior Editor, Jason Freed ponders the question above as hotelier’s bank on a break in one of the worst industry recessions ever.

Each time occupancy levels dip and hotel owners and managers aren’t meeting forecasted revenues, analysts and investors are assured the hotel industry is cyclical by nature and will surely rebound.

But after two years into a downturn that many are calling the worst in history, hoteliers are again left pondering the same harsh realities regarding supply and demand.  Are we in a business model that is a “new normal?”

The same thing happened after 9/11 and everyone said nothing would ever be the same again.

From firsthand experience, I can feel everyone’s pain since I opened a new 126-room Hilton Garden Inn here in Fort Myers a week after 9/11.  The years following were the worst I ever experienced … until now.

But I don’t buy into the belief that there is some type of “new normal”.  Eventually things will get better, financing will come back and there is a light at the end of the tunnel.

The article in Hotel & Motel Managementwrites about the twenty-five history of information collected by Smith Travel Research. Since the company began collecting data in 1986, there has never been a larger decrease in year-over-year revenue per available room than the 15.9% DECREASE from January 2008 to January 2009. The closest revenue losses were from January 2001 to January 2002, when RevPAR fell 13.2%.  By 2003, the industry had rebounded rather quickly, posting a 2% year-over-year increase in January.

Again, I can personally vouch for the fact since our Hilton Garden Inn recovered nicely and in 2004 the hotel had its best year ever.  Shortly thereafter we sold the property for high price as buyers replenished there cash positions and cap rates plummeted.

However, as the article points out, this time things are different.  From January 2009 to January 2010, RevPAR was down an additional 7%.

Although the economy can be blamed for both business and leisure travelers cutting down on trips, excessive supply has much to do with the current downturn as well. In Lee County Florida, the hotel base ballooned in 2009 as some 1,300 hotel rooms were opened.  This in an area of the country where no more than 200 new rooms would be acceptable.

Some blame can be pointed at the franchisors who proliferated the market with subsets of their brands and then “went wild” approving licenses. And developers who did not understand the local markets were getting capital so easily that they weren’t restrained by good underwriting.

It’s going to take us a while to reach a level of occupancy that’s going to sustain an increase in profitability.

How long it will take to reach a level of occupancy that will sustain a level of profitability is uncertain but will definitely be tied to the growth in GDP and a drop in unemployment.

What is for certain is that new hotel construction has dropped like a brick. 

According to the March 2010 STR/TWR/Dodge Construction Pipeline Report released this week, the total active U.S. hotel development pipeline includes 3,399 projects comprising 354,538 rooms.  This represents a 35.7% decrease in the number of rooms in the total active pipeline compared to March 2009.

us-hotel-pipeline-march-2010

Fifteen of the Top 25 Markets have more than a 50% decline in year-over-year rooms in construction.

The same phenomenon occurred following 9/11 and as a result occupancy eventually came back to sustainable levels.  As occupancy levels increased, average daily rates rose as well.

It will happen again this time around … it just may take a little longer.

Posted by Scott R. Lodde

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