Rushmore: Lessons Learned from Past Recessions

November 6, 2012

According to a recent article written by Steve Rushmore at Hospitality Valuation Services (HVS), the U.S. hotel industry is going through a period of uncertainty as a result of the upcoming presidential election which could have a huge impact on taxes, small businesses, operating costs, disposable income and governmental regulations.

As a result, many hotel developers, investors and lenders have been on the sidelines waiting for a clear direction before they start making decisions on where to deploy their capital.

In the article, Rushmore provides an intriguing look back in time when there was a similar period of economic malaise for a look at what stimulants contributed to the recovery and growth of the hotel sector.

He points to the decade of the 1980s had many of the same economic elements that the industry experienced over the past five years – a massive recession followed by slow recovery.

The following table shows Daily Hotel Room Night Demand for the U.S. Hotel Industry each year from 1979 to 1990. The table also shows the year-to-year numerical change in room night demand as well as the percentage change. It identifies the years the U.S. experienced a recession.

Rushmore points to the recession of the 1980s which was one of the longest recessionary periods in U.S. history.  This recession was the result of very tight monetary policy that was necessary to control the rampant inflation during the late 1970s as well as the energy crisis of 1979.

The table shows hotel demand started to drop in 1980 and continued for four years to 1983. The 6.5% decline in hotel demand was the largest since the Great Depression. The high level of inflation caused interest rates to peak at 17%, making it virtually impossible for anyone to obtain a mortgage. This devastated the real estate industry with new construction and transfers coming to a virtual halt.

To help us out of that recession, Congress focused their attention on stimulating the recovery in this segment to move the U.S. economy out of recession and the hotel industry benefited by the recovery as hotel demand started to increase in 1984 and reached the 1979 level in four years.

Hotel demand continued to escalate until 1990 when the economy went into another recession.

The tax shelters of the 1980s and the deregulation of the savings and loan industry were the stimulus Congress used to get the real estate sector growing again and hotels were perfect candidates due to the large amount of personal property that could be written off quickly. Tax shelters allowed hotel developers and investors to rapidly depreciate their properties and obtain investment tax credits, which effectively eliminated the need to put equity capital in the property. In addition, hotels could be totally financed with a mortgage (including the personal property).

The deregulation of savings and loan banks allowed them to start making commercial mortgages. This change in rules produced huge amounts of mortgage capital eager to get the higher interest rates from commercial lending.

As Rushmore points out, S&Ls, who had no experience with commercial lending, were literally throwing money at hotel developers to finance their projects.

Although the facts and circumstances are different than those of 30 years ago, the solution is similar since the main roadblock to new hotel development and transactions is the availability of new financing.

The article points out that the huge increase in new government regulations following the collapse of the financial industry has crippled banks and other lenders’ ability to make real estate loans.  Since lenders fear government regulators will increase their reserve requirements, label their loans as non-conforming they have stopped lending.

As with the deregulation of the S&L industry, Rushmore is calling on Congress to loosen the Draconian banking regulations so we can get back to a normal lending environment.


Posted by Scott R. Lodde


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