Hotel Selling’s ‘S’ Factors: Six Serious Selling Sins & Sound (Rx) Solutions
February 3, 2012
by Ed Iannarella
January 2012
1. SKIPPING RAPPORT: Would we BBQ chicken without 1st greasing the grill? No way! Too sticky a situation. Same applies to all other aspects of selling without 1st establishing rapport. For most selling situations, whether we like it or not, whether it’s fair or unfair, a good rapport is the single most important part of the sales process. We naively think of closing as wearing that label, but study after study shows that human connection reigns supreme in selling. Did you know that of all customers who left for a competitor, 80% of those said they were satisfied with their previous purchase (source: Harvard Business Review)? So, satisfaction does not translate into loyalty. But bonding emotionally is at the heart of rapport and loyalty. That same Harvard source reports that 97% of loyal customers are loyal for life! Although there certainly are other reasons people buy from us especially in a difficult economy (e.g., discounts we offer, their addiction to our brand or location, they literally must have our product/service due to a command from above or a demand from their client base, etc.), people typically “buy” us before they buy what we’re selling. Buyers like to buy from people they like, feel comfortable with, and/or trust. This is the essence of rapport.
Let’s recognize that although rapport building is generally taught as the 1st step in a sales call, it must be an ongoing process throughout the entirety of any sales interaction. Yes it’s often difficult to do with some prospects who are just different from us or who won’t allow us to bond for any number of reasons. Sometimes, lack of time inhibits our ability as well. Researching your prospects (via Linked In, social media, organizations’ websites, addictomatic.com, and even listening to vocal clues about prospects from their voice mail messages) can often offer opportunities that may give you an edge to connecting with them. As other studies tell us, words (i.e. verbal communication) are the weakest way to connect with others. This tells us we have to master the other 2 “V’s” of communication: Visual (body language) and vocal (voice related) clues that comprise 93% of our effectiveness as salespeople (check out FAQ’s on nlp.com).
2. SUBSTANDARD “ASKING” SKILLS: As doctors (and great salespeople) all know, “prescription” (solutions) without proper diagnosis (qualifying) is malpractice (poor selling).
To get what we want from someone (like a prospect with roomnights), keep these principles in mind: We have to ask specifically by stating exactly what we want, do it quickly, and ask at the right time (in the selling cycle and when the prospect is ready, willing, and able). We must also learn to ask for the same thing in different ways on occasion, and always ask someone who can actually help us (decision makers/influencers)! Quick tip: Never ask, “Are you the decision maker?” If they are, they may think you’re challenging their authority, and if they’re not, they may feel humiliated. Much better is to ask, “Who else, besides you, is involved in the decision-making process?”
3. SALES PRESENTATION “ERRORS OF OMISSION“: We’re all sometimes guilty of “errors of commission,” things we did wrong such as mentioning too many features, addressing the wrong needs, and taking too long to address the correct needs. However, far more frequent are “errors of omission,” things we neglected to say or do. Here are some of the most common (and dangerous) errors of omission: not addressing the prospect’s most important needs first (or worse yet, ever!), not directly comparing ourselves to other prospect options during our presentation, missing prospect “signals,” passing on the chance to validate our worth, and not asking for confirmation from our prospect before closing.
Diffuse stress associated with a prospect’s most important needs by tackling them before other, less critical needs. Don’t shy away from direct comparisons. Instead, “Dare to compare!” We owe it to our employers and fellow workers who depend on our revenue-generating skills. Remember to point out your product (amenities/services) and your personal points of differentiation (what makes you different/better as handlers of their account). Be sure to include your “USA’s”: Unique Selling Advantages© especially if the competition offers similar things. Notice prospect signals by closely observing them through active listening to their tone as well as watching their body language. Validate during your presentation by offering 3rd party testimonials (what others said about you/your hotel: provide visual proof later via e-mailing attached testimonials) as well as by mentioning any awards you/your property/brand has recently won. Verify prospect receptiveness on occasion during the presentation (How’s that sound so far?) and do so at the end of this “meeting needs” step before quoting rates and attempting to close.
4. SELF-DESTRUCTIVE LAST IMPRESSION: We’ve all heard about the critical 7 seconds of an initial prospect interaction, but equally important is the way we exit (a phone call, an outside appointment, a site tour, a group presentation, etc.), as it’s pretty easy to undo an otherwise good call with a weak parting handshake, a lack of eye contact, or a far-too-casual “See you ‘guys’ later.”
Practice a sincere “Thank you for your time” and a reasonably firm handshake, or if you dare to emulate me, “mirror” their handshake to establish “physical commonality.” Sound too “New Age” for you? Call me for a 1 minute explanation or purchase/download “Reading People” by Jo-Ellan Dimitrius and delve into the area salespeople MUST master to be at the top of their profession: Neuro-Linguistics (NLP).
5. SLIGHTING (OR TOTALLY) IGNORING MENTORS: There are 2 basic ways to learn anything (including how to be the best salesperson we can be): 1) experiential which is learning from our mistakes or 2) through being mentored. The 1st (AKA trial and error) can teach us things we’ll never forget, but all too often that’s due to the high price we pay in excessive time, money, and hardship required. We are taking the test 1st, and learning the lesson second. Being mentored saves us time and usually reduces the pain of making unnecessary mistakes. Here, we learn the lesson 1st (from others who have excelled at the task and are willing to help us succeed), and then take the test second. Sadly, so many of us still choose to do things the hard way, only to find that there are plenty of painful experiences for us compliments of prospects, clients, co-workers, and bosses. Ouch! Why be a grouch? Be a “mentee!”
If you’re lucky enough to have access to live mentors, don’t think twice. Just say yes! These can be supervisors at your hotel, elsewhere in your management company, or at the brand level (if applicable) who can make themselves accessible to you on a consistent basis. Ask 100 questions, take lots of notes, try their suggestions on for size ASAP, and report back for a critique to discuss what worked and what didn’t. Ask your mentor if you can do anything for them in return. But what if no actual (or willing) mentors are available? All is not lost especially with recent enhancements in technology and communication. Simply look for virtual or surrogate mentors to fill the niche. Available surrogate mentoring sources include CD’s from subject matter experts (surf the American Hotel and Lodging’s Educational Institute), live seminars or classes, webinars, and downloads (audible.com is great!). If you’re part of a chain, tap into your brand’s many e-resources. Remember that many programs are archived in case you were unable to “attend.” And speaking for other live mentors, we can’t compete with the 24/7 availability factor offered you by CD’s, archived sessions, and downloads. Find your mentors and start your learning engines right now. Learning isn’t a spectator sport!
6. SHOWING LITTLE OR NO RESPECT: Even if we have a great product or service to sell, or if we have excellent sales skills, we may finish last in getting a prospect’s commitment if we’re initially perceived as selfish or uncaring before or during a sales call. We may not even get to do a call if we seem disrespectful.
Begin with the end in mind. When calling someone to qualify, to present, or to simply introduce yourself, try this question (or a close variant) immediately after you identify yourself: “Is this a good time or a bad time to speak with you about your …(upcoming conference/business travel, hotel needs, etc.)?” Some prospects will say it’s OK, but due to suspicions about salespeople (compliments of our selling ancestors back in the last century), most will tell you it’s not a great time and even give you a reason or 2. This is potentially a good thing for you as you reply with, “No problem. I respect your time and that’s why I asked. When would be a better time for us to speak?” Though not always, prospects frequently will then offer an alternate time frame (and despite not verbalizing it, they will be pleasantly surprised at the respect level you demonstrated and that’s about as good a 1st impression as you can expect!). And, by the way, you went from a cold call to an appointment call (ending with your “OK great. I’ll try you Thursday after 1:00 and thanks for your time, sir.”), and your prospect set the appointment! Remember that you “never get a second chance to make a first impression.”
About the author:
Ed is President of Stonehenge Consulting Group and an affiliate of the Alliance Group. Stonehenge provides hotel sales performance and top line revenue consulting. Ed is a frequent speaker/trainer at national brand and management company conferences, HSMAI chapters, and U.S. Navy-operated hotels. People from over 30 countries have attended his U.S.-based selling workshops, and he has delivered hotel sales training in 8 countries.
Headlines – Week of November 20, 2011
November 29, 2011
Lodging Asset Values in Recovery
Despite inconsistent economic news, increases in lodging demand and property-level net operating income (NOI) have most industry participants feeling optimistic that hotel property values are heading upward. The 2011 edition of the Hospitality Investment Survey conducted by PKF Consulting sheds some light on the market and transaction factors that are influencing this line of thinking.
Here are some the findings from the survey:
- Overall capitalization rates for all hotels decreased 110 basis points when compared to 2010. This reflects survey respondents’ reaction to the more attractive debt environment, as well as the anticipation that property level NOI will continue to increase. Investors continue to place a premium on the full service segment due to its greater upside, high barriers to entry and the current difficulty to obtain construction financing. Terminal capitalization rates also declined compared to our previous survey, however to a lesser degree.
- Concurrent with the decline in capitalization rates, discount rates, or un-leveraged IRR’s, for hotels decreased to 11.75 percent. The 253 basis point spread between the overall capitalization rate and discount rate suggests investor yield requirements have lowered when compared to last year, likely due to the decreased level of risk and overall landscape of the current lodging market.
- Equity yields followed a similar downward trend, though hotel investors continue to expect handsome returns when compared to other forms of investment real estate. Cash-on-cash returns experienced little change compared to what we learned in 2010, and the average holding period indicated by the survey respondents decreased slightly.
- Overall deal volume, particularly among real estate investment trusts (REITs), has surged since the beginning of 2011. With a lower overall cost of capital and financing flexibility that includes equity along with debt, REITs are aggressively targeting hotel properties in all segments, particularly high quality assets in major markets. Leading the way is Ashford Hospitality, who spent $1.28 billion on the 28-property Highland Hospitality portfolio. Pebblebrook Hotel Trust (spending over $780 million on 10 hotels) and Apple REIT (spending roughly $475.8 million acquiring over 20-hotels) have also been active players.
- Debt service coverage ratios also decreased and are now in line with 2008 levels, suggesting that lenders are starting to “loosen up” with regards to their underwriting. This year’s survey indicated that interest rates reached their lowest point in recent history at 6.69 percent, a decrease of 84 basis points when compared to 2010. Loan-to-value ratios increased compared to last year, but remain well below 2007 levels.
2012 Outlook Remains Positive for U.S. Lodging Industry
PKF Hospitality Research also released their preliminary Hotel Horizons® updated forecast for the U.S. lodging industry. Based on performance data through September of 2011 (provided by Smith Travel Research), and Moody’s Analytics’ October 2011 domestic economic forecast, PKF-HR believes that RevPAR in the U.S. will increase by 8.1 percent in 2011, and rise another 6.2 percent in 2012.
The 8.1 percent revised RevPAR forecast for the current year represents a 90 basis point increase over their previous forecast released earlier this year.
Because of the accelerated performance in 2011, the PKF forecast change in RevPAR for 2012 has been lowered 110 basis points from 90 days ago to still-attractive 6.2 percent.
PKF is optimistic for lodging’s performance in 2012 and is based on the economic forecasts of Moody’s Analytics. Real personal income is projected to rise, and is the most important element of Gross Domestic Product (consumer spending and business investment).
Best Housing Markets for Big Bargains
A recent report from the financial analysis firm 24/7 Wall St. has identified the housing markets expected to offer some of the biggest discounts for home buyers. Many of these markets have been plagued with large gluts of foreclosures that have dragged down prices. Six of the ten markets on the list have had median home prices fall to less than half what they were five years ago.
All of the top 10 most popular metros have experienced double-digit price declines from peak to trough, with seven out of 10 experiencing declines approaching 50 percent or more, according to figures from the Federal Housing Finance Agency.
Half of the top10 metros are in Florida, two are in Southern California, and one is in Nevada — specifically the Las Vegas metro area.
Eight out of 10 metros had median list prices of less than $150,000 as of Nov. 15, with the exceptions of both California markets.
The following are the top five housing markets which offer home buyers some of the biggest discounts:
1. North Port-Bradenton-Sarasota, Fla.
Median home price: $170,000
Home value decline from peak: -51.4%
Predicted change in home value through 2Q 2012: -6.5%
2. Riverside-San Bernardino-Ontario, Calif.
Median home price: $180,000
Home value decline from peak: -55.4% (14th biggest decline)
Predicted change in home value through 2Q 2012: -14.8%
3. Charleston-North Charleston, S.C.
Median home price: $200,000
Home value decline from peak: -23.3%
Predicted change in home value through 2Q 2012: -1.6%
4. Fort Lauderdale-Pompano Beach, Fla.
Median home price: $199,000
Home value decline from peak: -48.4%
Predicted change in home value through 2Q 2012: -9.2%
5. Cape Coral-Fort Myers, Fla.
Median home price: $106,000
Home value decline from peak: -59.3%
Predicted change in home value through 2Q 2012: -12.2%
Posted by Scott R. Lodde
New Hotel Construction Lowest in Years
February 18, 2011
According to Lodging Econometrics, construction financing for new hotel projects will remain largely unavailable in 2011 and lodging operating metrics will improve, but only at a slow pace.
Lodging Econometrics (LE), based in Portsmouth, NH compiles and maintains a census of open and operating hotels of more than 60,000 hotels in the U.S. and Canada. The firm publishes a construction pipeline overview on a quarter basis. LE defines three stages in the construction pipline; Under Construction, Starts Next 12 Months and Early Planning.
The firm’s 4th Quarter 2010 report indicates that developers pushed a large number of their projects in the construction pipeline from a “scheduled start” back to early planning. As a result, the number of scheduled starts decreased 15% by projects and 13% by rooms quarter-over-quarter, while early planning saw an 8% project and 6% room increase.
In Q4 2010, few new projects started construction. This resulted in a historic low of 449 projects/53,991 rooms in the “under construction” stage, which now accounts for just 14% of all projects in the total hotel construction pipeline.
For 2011, LE is now projecting just 446 hotels/46,343 to come online, a gross growth rate of 0.9%. That’s a fall-off of over two-thirds from the cyclical highs in 2008 and 2009. For 2012, the LE forecast calls for 487 hotels/48,860 rooms to exit the pipeline as new supply. In 2010, 635 new hotels/70,849 rooms opened, just half of what opened in 2009, resulting in a supply growth rate of 1.5%.
Since banks are not likely to finance new construction until most of the “distressed loans” are cleared from their portfolios and the lodging industry’s operating performance has improved, construction activity will be subdued at least into 2012.
LE’s overview indicates that the construction pipeline for hotels is at its lowest level since Q2 2005, with 3,122 projects/372,813 rooms at the end of Q4. With just 1,241 projects/151,435 rooms entering the pipeline in 2010, new projects are at a low not seen since 2004 and are expected to remain in a low into 2012.
Scheduled starts in the next twelve months declined for an 11th consecutive quarter to 1,036 projects/112,459 rooms.
The following charts are taken from the firm’s latest executive summary.
Posted by Scott R. Lodde
Hotel Forecast Turns Positive
January 6, 2011
The big four in hotel consulting turned very bullish in their forecast for the hospitality industry as 2010 progressed. As the year ended, PricewaterhouseCoopers (PwC), Colliers PKF Hospitality Research (PKF), Smith Travel Research (STR) and Hospitality Valuation Services (HVS) all came out with forecasts for 2011 and beyond.
All four firms predict 2010 will end with positive occupancy growth (5.3% to 5.7%). With the low levels of supply growth anticipated through 2012, two of the firms predict occupancy to rise above the 60% mark in 2012 (PwC and STR did not provide a forecast for 2012).
As a result, revenue per available room (RevPAR) will grow 4.3% to 5.7% for the first time since 2007.
2010 ended better than anyone expected as the year began and as a result the firms forecast ADR increases for 2011 between 3.9% and 4.8%.
The recovery in lodging demand however is only part of the story. Since 2007, 3,300 new hotels have opened, and PwC estimates that room inventory in 2010 will average 7.7% ahead of 2007 levels. Occupancy rates in 2010 are 8.2% below 2007 levels, and average daily rates are 6.0% below, resulting in RevPAR 13.7% below 2007 highs according to their numbers.
A return of business travel and some group activity have contributed to the positive trends seen in 2010 as the industry decreased reliance on more price-sensitive booking channels. In 2011, continuation of such shifts in the mix of business, as well as increases in negotiated rates and moderate gains in group demand, are expected to drive the higher rates that are predicted.
ADR increases, combined with higher occupancy levels, are expected to increase RevPAR 5.5% to 7.4%, the largest annual gain since 2006.
The other major factor affecting hotel fundamentals is the slowdown in construction. According to the latest (November 2010) STR/McGraw Hill Construction Dodge Pipeline Report, total active U.S. hotel development pipeline comprises 3,174 projects totaling 330,920 guestrooms, a 20.7% decline since November 2009.
The following chart is the consensus of predictions from the four firms:
Posted by Scott R. Lodde
Headlines – Week of August 1, 2010
August 8, 2010
Headlines – Week of August 1, 2010
California Hotel Defaults More Than Double Since 2009
The hotel segment of the real estate market has been one of hardest hit during the Great Recession. According to an article published by Globest.com, the number of defaulted and foreclosed hotels in California continued to rise in the second quarter, climbing by 18% between the first and second quarters and increasing by 132% since the second quarter of 2009. The information in Globest.com was quoting information in a new report from Irvine-based Atlas Hospitality Group.
The survey from Atlas shows that 478 California hotels are in default or have been foreclosed upon, but the company believes the true number of distressed California hotels is much higher, with “over 1,000 properties operating under some form of forbearance agreement.”
Although banks and special servicers are still practicing an “extend-and-pretend” approach to troubled properties, there are signs that both are turning to foreclosure more readily, especially special servicers, who are “being more forceful in taking back hotels,” according to the report.
Many of the defaults are a result of the Extended Stay America from bankruptcy which account for about 20% of the properties on the Atlas default list.
The report notes that of the 100 California hotels that had been foreclosed on as of the second quarter, only 12 had been resold to new investors. At the current levels of sales and foreclosures, the long-term outlook is that the distress in the state’s hotel market would take about four to five years to work through.
STR Reports First-half 2010 Results
According to a report by Smith Travel Research, the U.S. hotel industry reported mixed results in the three key performance metrics for the first half of 2010 in year-over-year measurements.
The industry’s occupancy was up 4.4% to 56.4%, average daily rate fell 2.0% to $97.18, and revenue per available room increased 2.3% to $54.80.
In second-quarter 2010, occupancy increased 6.2% to 60.7%, ADR ended the quarter flat at $97.87, and RevPAR increased 6.2% to $59.44.
The report indicates that first-half and second-quarter U.S. hotel industry performance demonstrated improvement from 2009-particularly on the demand (rooms sold).
ADR growth is slowly improving, primarily at the upper-end, and STR expects continued gradual improvement through the second half of the year. STR is forecasting full-year 2010 RevPAR growth of just over 5%, driven almost exclusively by occupancy gains.”
In the first half of 2010, 23 of the Top 25 Markets experienced occupancy increases.
Boston, Massachusetts, led the increases, rising 14.8% to 65.4%, followed by Detroit, Michigan (+11.2% to 51.4%), and New Orleans, Louisiana (+10.7% to 66.7%). Houston, Texas, reported the largest occupancy decrease, falling 4.6% to 56.7%, followed by Norfolk-Virginia Beach, Virginia, with a 2.9% decrease to 49.6%.
New York, New York, posted the largest ADR increase, rising 5.4% to $209.42. Tampa-St. Petersburg, Florida, reported the largest ADR decrease, falling 10.7% to $97.98, followed by Detroit with an 8.5% decrease to $75.29.
Four markets achieved a RevPAR increase of more than 10%: New York (+15.2% to $165.56); Boston (+13.7% to $89.39); New Orleans (+12.4% to $81.66); and Miami-Hialeah, Florida (+11.0% to 117.33). Houston dropped 10.0% in RevPAR to $51.60, reporting the only double-digit decrease in that metric.
Mid Year 2010 Major US Hotel Sales Survey
The CB Richard Ellis Mid Year 2010 Major US Hotel Sales Survey includes 42 single-asset sale transactions of more than $10 million each that are not part of a portfolio allocation.
These transactions totaled more than $1.8 billion and include 11,700 hotel rooms with an average sale price per room of $158,000. During Q2 2010, 28 sales transacted for a total of more than $1.1 billion, as trade activity continues to outperform on a quarter-over-quarter and year-over-year basis, according to an analysis written by Daniel Lesser featured on GlobeSt.com.
Notable observations from the CB Richard Ellis Mid Year 2010 Major US Hotel Sales survey include:
- Heightened transaction activity has clarified capitalization rates, both on a trailing 12-month and projected year-one basis, but offer limited transactional insight as they display a broad range from negative to upwards of 10% for quality assets;
- Coming off of severely depressed 2009 operating metrics, United States hotel transaction pricing is not capitalization rate-based, but rather predicated on discounted cash-flow analysis that factors in perceived upside during the next several years;
- Public companies, both seasoned (i.e. Sunstone Hotel Investors, LaSalle Hotel Properties, DiamondRock Hospitality) and newly formed entities (i.e. Chesapeake Lodging Trust, Pebblebrook Hotel Trust) dominate the acquisition landscape;
- Private equity groups that are exclusively focused on the hotel sector (i.e. HEI Hotels & Resorts, Noble Investment Group, Apple Nine Hospitality) also are actively deploying capital to acquire U.S. hotel assets;
- The highest price per room paid was $600,000 for the Buckingham Hotel in New York. When compared with the Qatar Investment Authority’s recent acquisition of the Raffles Singapore at $2.7 million per room, U.S. hotel assets are relatively inexpensive.
Posted by Scott R. Lodde
Headlines – Week of July 11, 2010
July 16, 2010
STR: Host Study reveals U.S. hotel industry hit hard in 2009
According to a report issued by Smith Travel Research (STR), the U.S. hotel industry ended 2009 with US$92.41 billion in room revenue, the lowest year-end room revenue since 2004 (US$85.18 billion).
The information was gathered from the Hotel Operating Statistics (HOST) Study for 2009, compiled by STR.
The HOST Study is an extensive and definitive database on the U.S. hotel industry revenues and expenses. The study includes operating statements from more than 5,900 hotels. HOST contains information on hotel revenues and expenses, as well as presents information by department including rooms, food & beverage, marketing, utility costs, property and maintenance, administrative & general, and selected fixed charges.
According to the HOST Study, room revenue in 2009 fell 14.2% in year-over-year comparisons. Total revenue for the industry declined US$13.4 billion to US$127.2 billion. This loss in revenue resulted in a reduction in the Gross Operational Profit (GOP) to 34.0%, compared to 38.2% in 2008.
Each of the three key performance metrics, including occupancy, average daily rate and revenue per available room, reported decreases during every month of 2009. RevPAR fell 16.7% to US$53.53, the worst decline recorded since STR started tracking the industry in 1987.
Other highlights of the HOST Study:
- Full-service hotels reported an average occupancy rate of 62.5% and ADR of US$146.74 in 2009, compared with 2008 when occupancy was 67.4% and ADR was US$164.31.
- Full-service hotels’ GOP for 2009 was 29.4%, compared to 34.3% in 2008.
- Among the participants, full-service hotels generated US$233.72 in total revenue per occupied room night. Full-service independent hotels produced US$295.22 in total revenue per occupied room night, and full-service chain-affiliated hotels produced US$227.86.
- Overall, limited-service hotels reported occupancy of 63.3% for 2009 and year-end ADR of US$85.26.
- GOP for participating limited-service hotels in 2009 was 47.1% (compared with 51.2% in 2008), which amounts to US$9,485 per available room.
- Among the limited-service hotels, the Middle Atlantic region reported the highest occupancy (68.6%), followed by the Pacific region (68.4%).
STR/TWR/Dodge: Hotel Construction Pipeline
The total active U.S. hotel development pipeline comprises 3,387 projects totaling 358,739 rooms, according to the June 2010 STR/TWR/Dodge Construction Pipeline Report released this week. This represents a 28.5% decrease in the number of rooms in the total active pipeline compared to June 2009. The total active pipeline data includes projects in the In Construction, Final Planning and Planning stages, but does not include projects in the Pre-Planning stage.
Among the Top 10 Markets by rooms in the In Construction phase:
- New York topped the list with 9,416 rooms (compared with 12,870 rooms in 2009), which represents a 27.0% decrease from 2009
- Houston, Texas, with 2,527 rooms (52.0% decrease from 2009)
- Dallas, Texas, with 2,168 rooms (a 28.0% decrease from 2009)
- Las Vegas, Nevada, reported 1,243 rooms in the In Construction phase and fell 84.0 percent compared to 2009, for the largest decrease among the top 10 markets.
Marriott Reports Encouraging 1st Quarter 2010 Earnings
Marriott International Inc.’s (MAR) second-quarter earnings more than tripled, fueling optimism that the lodging industry is finally turning the corner from a brutal downturn.
Wall Street had anticipated a strong second quarter for hoteliers as they continue to benefit from cost-cutting measures and increased corporate and leisure travel despite lingering concerns about the national economy.
Analysts at Robert W. Baird & Co. believe the market is still looking for group bookings to significantly pick up. Baird expects national revenue per available room rates to increase 6% during the second quarter compared to the same period last year and anticipates that increases in revenue will boost profitability for the first time since 2007.
In a sign of improving demand, revenue per available room, or RevPAR, in the first five months of the year rose 1% to $52.99, according to Smith Travel Research Inc. In comparison, it averaged $64.57 in the first five months of 2008.
In the most recent period, Marriott’s RevPAR jumped 9.9%–or 8.2% in constant dollars–beating April’s prediction for 5% to 7% growth.
Posted by Scott R. Lodde
Headlines – Week of May 30, 2010
June 7, 2010
One of the consequences of the Great Recession was the emergence of a new form of leisure travel called a “staycation.” In their 2010 Portrait of American Travelers the Ypartnership/Harrison Group suggests this phenomenon is growing.
Specifically, fully one in four U.S. leisure travelers with an annual household income of more than $50,000 took at least one overnight leisure trip/vacation within a 50-mile drive radius of their home during the previous 12 months as an alternative to vacationing in a farther destination. This type of trip ranked higher among younger travelers than older travelers, yet equally evident across all households regardless of their annual household income.
Staycations are more than a short-term trend brought about by the poor economy and appear to be real and represent a discernible shift in consumers’ leisure travel behavior. It is important to understand, however, that the typical leisure traveler takes an average of four trips annually, so one should not come to the conclusion that staycations have necessarily replaced all well-established patterns of leisure travel. However, the implication for lodging marketers is clear; local and regional origin markets retain considerable potential for generating incremental room nights in the years ahead, and this potential is likely to remain robust through the duration of 2010 and well into 2011.
Lodging Industry Forecast Shows Recovery in Sight (from PricewaterhouseCoopers)
In the company’s updated U.S. lodging forecast, PricewaterhouseCoopers’ expects continued recovery of demand, with the ability to increase room rates returning in 2011, after two consecutive years of decline. The initial months of 2010 suggest that a sustainable recovery of lodging demand has begun. As businesses and consumers gain further confidence in the strength of economic recovery, discretionary spending is expected to continue to increase, contributing to progressive increases in lodging demand through the remainder of 2010, though the pace of recovery is expected to moderate.
With lodging supply growth expected to lag demand growth for the first time since 2006, PWC expects hotel occupancy levels in 2010 to increase. Average daily rates (ADR) are not expected to increase until early next year, resulting in a moderate occupancy-driven increase in revenue per available room (RevPAR) in 2010, with a more substantial, rate-driven recovery in RevPAR expected in 2011.
The PWC quarterly lodging forecast is based on an updated macroeconomic forecast from Macroeconomic Advisers, LLC (MA). MA expects real gross domestic product (GDP) growth to be above its long term average, but below the typical growth expected after a deep recession. MA expects GDP to increase 3.5% in 2010, followed by a 3.9% increase in 2011.
The current slowdown in hotel construction activity is a key element in the foundation for recovery in operating performance of existing hotels. The pace of new construction starts fell from 134,000 rooms in 2008, to 47,000 in 2009, and most recently to a pace equivalent to approximately 29,000 rooms (annualized) through the first quarter of 2010.
This sets the context for progressively slower supply growth of 1.9% and 0.4% in 2010 and 2011, respectively. This constrained supply growth, combined with gradual recovery in lodging demand, is expected to result in increases in occupancy levels to 56.6% and 58.2% in 2010 and 2011, respectively. The industry has experienced a more pronounced rebound in transient demand. However, until group bookings pick up, realizing significant increases in room rates in many hotels and markets will be challenging. As a result, PricewaterhouseCoopers forecasts ADR levels to decrease a further 1.7% in 2010, before growth resumes with a 3.5% increase in 2011.
Click to enlarge
Sources: Smith Travel Research and PricewaterhouseCoopers
Posted by Scott R. Lodde
Headlines – Week of May 9, 2010
May 17, 2010
Debt Capital Market Update(from Jones Lang LaSalle Hotels)
According to a recent update from Jones Lang LaSalle Hotels there continues to be an imbalance between the limited supply of available properties and the vast amount of available equity capital on the sidelines. According to the report, this has created a unique window of opportunity whereby the market has transformed itself into a “seller’s market”. So far in 2010 only $1.1 billion of hotel transactions have been completed in the United States.
Despite a limited amount of distressed asset sales, increased activity has been seen in structured equity recapitalizations fueled primarily by the inertia of balance sheet lenders and special servicers.
The most activity has been seen with mezzanine lenders who have the ability and willingness to invoke the UCC (Uniform Commercial Code) foreclosure process. This is the process in which the lenders foreclose out the equity interests pledged by hotel owners (borrowers), allowing the mezzanine lenders to step into the equity position and take control of problem hotel assets. Unlike a real estate foreclosure which can be a cumbersome and sometimes litigious process, the UCC foreclosure process allows the mezzanine lender to quickly and efficiently take control of such hotel properties within a four to six week timeframe.
Jones Lang LaSalle Hotels has been recently involved in some of the well-publicized UCC Foreclosures including the Gansevoort Hotel in Miami, the Four Seasons Resort and Club in Las Colinas, and the W Hotel and Residences Downtown Atlanta. The company believes that as fundamentals continue to improve and the value curve begins its upward climb, we are likely to see more and more mezzanine lenders take action against troubled borrowers and step into a controlling position in order to control their own investment destiny. This will also likely increase the value of such mezzanine positions leading to a more vibrant market for mezzanine position trades.
Extended-stay Hotel Demand at Record High (from The Highland Group)
According to the U.S. Extended-Stay Lodging Report: First Quarter 20010 published by the Highland Group, extended-stay hotels accommodated 19.3 million room nights in the first quarter of 2010 as demand surged 16.5% compared to the same period in 2009. Room nights accommodated were the highest ever during a first quarter period.
Strong demand growth combined with a sharp decline in new rooms opening and occupancy rose more than 10%. Quarterly increases in occupancy of this size have not been seen for at least a decade. Falling decreases in average rate boosted extended-stay RevPar to its first positive quarterly increase following six consecutive quarters of decline.
Project Openings to Be Cut In Half (from Lodging Econometrics)
According to a report from Lodging Econometrics, new hotel opening are now forecast to decline 54% in 2010 as compared to 2009. The company projects 715 hotels with 80,830 rooms will open this year with gross supply estimated 1.7%; lower than other industry predictions.
For the first quarter, the hotel construction pipeline stood at 3,395 projects with 396,797 rooms. The Q1 2010 pipeline represents the first time in four years the pipeline has fallen below 400,000 rooms. Totals have also now decreased 42% by projects and 49% by rooms from the Q2 2008 peak.
According to the report, the 300,000-room pipeline threshold will be attained early next year. For 2011, they expect 654 hotels with 63,141 rooms to come online for a gross growth rate of 1.3%. There have now been seven consecutive quarters of rapid pipeline declines.
They report that Courtyard by Marriot accounts for 16% of all total upscale projects in the pipeline with 110 and that three Marriott International brands make up a combined 42% of the upscale pipeline. IHG has the largest pipeline of any company at 675 projects and 67,992 rooms.
In terms of markets, the top five pipeline markets of New York, Washington, Houston, Phoenix and Dallas make up 49% of the total rooms pipeline and 49% of all guestrooms expected to open in 2010.
Posted by Scott R. Lodde
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.
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
Headlines – Week of March 21, 2010
March 26, 2010
Is the Hotel Industry Set for a Recovery?
PKF Hospitality Research recently announced that U.S. hotels should enjoy double-digit revenue growth by 2012. The information was published in the March 2010 edition of Hotel Horizons®.
PKF-HR is forecasting hotel room revenue to grow 10.5% on a per-available-room basis (RevPAR) in 2012. The strong growth in RevPAR is driven by Moody’s Economy.com’s forecasts for income and employment. In 2012, Moody’s is projecting income to grow at a 4.4%, a rate not seen since 2006. In addition, their 3.2% forecast for employment growth in 2012 is an all-time high since 1988.
Until 2012, however, market conditions will remain relatively soft. For 2010, PKF-HR is forecasting a 1.1% decline in RevPAR, the third consecutive year of falling RevPAR for the U.S. lodging industry.
Despite the decline in RevPAR this year, they predict lodging market conditions will turn and improve throughout the year as demand for hotel rooms has been greater during the first quarter of 2010 than it was during the same period the prior year. This growth in demand is expected to persist throughout the year and result in an annual increase in rooms occupied of 1.5%.
Smith Travel Research (STR) is forecast room supply to grow only 1.2% in 2010, down from the 3.2% net increase in new rooms that were opened in 2009. With demand rising at a 1.5%, the average occupancy rate for the U.S. lodging industry is expected to increase 0.3% to 55.2% in 2010.
According to PKF-HR, rate discounting will continue in 2010 with national occupancy levels are below the 60% level. The company does not believe that quarterly ADR will exceed 2009 levels until the third quarter of 2010. They forecast ADR will increase 3.4% in 2011 after declining 1.4% in 2010.
Deloitte Reports Commercial U.S. Real Estate Potentially Hits Bottom in 2010
According to Deloitte’s Perspectives on Real Estate: Uncovering Opportunity in a Distressed Market, while declining values, debt maturity and tight credit access, and stalled construction may continue to plague commercial real estate in the United States for the remainder of 2010, economic indicators point towards the potential for economic recovery this year. For investors, this environment reveals a window of opportunity in 2010 when investment in distressed assets may prove to be opportune.
According to the report, the challenges that affected owners and operators in 2009 will extend over the next nine to 18 months. They include:
1. Declining real estate values - U.S. commercial real estate values have decreased significantly; according to some reports, up to 40% across all property types since their peak in 2007. Declining values are driven by job losses and declining consumer spending. As a result, vacancies are up and rents are down which lead to decreasing values, especially in office and retail assets. In Midtown Manhattan, for example, brokerage CB Richard Ellis Group Inc. reports that the amount of available office space has increased by 16 million square feet since the beginning of 2008; building owners subsequently have dropped their asking rental rates by more than 30% since November of that year.
2. Debt maturity and credit access - Organizations which took out large loans to purchase property during the market’s boom did so assuming that rents and occupancy rates would continue to rise; instead, both have fallen dramatically. Declining real estate values exacerbate the ability of property owners and investors to find or refinance debt. According to Deutsche Bank, more than $1.4 trillion in commercial mortgages will come due by 2013, and as much as 65% of these will have difficulty getting refinanced. Although capital markets for credit and debt have opened to some extent, the situation is different than before since lenders are allowing less leverage on new loans. Also, debt is more expensive, in part, because lenders are only willing to lend at a lower loan-to-value rate. Finally, the commercial mortgage-backed securities (CMBS) market, a huge source for real estate debt capital in the past decade, has virtually disappeared, severely affecting the supply of debt capital. Owners and mortgage holders will likely continue to struggle with debt maturity in 2010 and beyond, with an expected increase in foreclosures and deeds in lieu. Opportunistic investors, many who raised significant capital for this purpose, are using foreclosed properties and distressed debt as a strategic opportunity to make opportunistic acquisitions and expand their real estate portfolio.
3. Stalled construction – There will likely be almost no new construction activity in any asset class in 2010, (evidenced by the glut of office space in Midtown Manhattan and other major markets, as well as an oversupply of full- and/or limited-service hotel inventory and multi-family residential properties in areas such as Florida, Nevada, Arizona and parts of California) leading to historic low levels of new construction with excess capacity in almost every asset class.
4. Bottom out, then recover - Some real estate asset classes are expected to bottom out and then start to recover in 2010. Rent levels will begin to rise with job growth and increases in consumer spending and gross domestic product (GDP), although this will likely be a slow rise. Some industry observers believe that the hospitality market has already bottomed out. Occupancy rates in 2009 were extremely low due to significant declines in leisure and business travel, which drove down the average revenue per available room (RevPAR). Multi-family residential may be the first to rebound because of the short term nature of their leases, with longer-term leased assets like retail, office and industrial recovering more slowly. Single-family home prices seem to have solidified, although it could take years for home values to truly recover.
5. Markets to watch- Although a handful of hospitality markets, including San Francisco and Atlanta, are expected to post positive room rate growth, the majority will need to wait until 2011 for a return to profitability. Bright spots in the office market include Washington, D.C., which has benefited from the federal government expansion, and New York, which has begun to turn around due to increased hiring at investment banks. Residential oversupply remains a problem across Miami, Atlanta, Phoenix and Las Vegas.
6. Where are the investors? – Capital is available and waiting to deploy, and the financing environment has improved somewhat, yet most commercial real estate investors have waited on the sidelines for a sense that values have reached bottom. Many of these investors will remain sidelined until better employment figures and consumer spending numbers spur a subsequent resurgence in real estate. However, some deal making that was evident during 2009 bodes well for 2010.
Public capital markets have shown increasing interest in commercial real estate, a trend that should continue in 2010 most notably via real estate investment trust initial public offerings (REIT IPOs) and secondary offerings. The U.S. should see a significant influx of foreign capital from Asia (especially China and Korea), Germany and the Middle East, as well as from domestic investors. Well capitalized REITs and funds will likely see increased opportunities to make distressed acquisitions, both geographically and across property types.
Florida AG McCollum warns of commercial foreclosure crisis
Attorney General Bill McCollum recently wrote to legislative leaders urging them to take note of the potential for “massive” foreclosures on commercial real estate, as many commercial real estate loans from Florida’s most recent boom reach the end of their terms about the same time.
McCollum is Florida’s current Attorney General and a gubernatorial candidate.
In his letter to Florida House Speaker Larry Cretul, McCollum wrote. “As one of the largest markets in the nation for commercial real estate loans, Florida faces a significant risk of financial loss.”
McCollum is urging lawmakers to look at some of the actions other large states have taken, including the passage of laws that require that all claims be consolidated into a single action, or prohibit certain lawsuits that seek to hit up borrowers personally before proceeding against the borrower’s collateral.
McCollum’s office created the Interagency Mortgage Crisis Task Force in 2008 designed to help educate and assist homeowners about to go into foreclosure. The task force has hosted community forums on the problem, providing distressed homeowners with access to lenders, counselors, voluntary bar associations, and state and federal housing and finance agencies.
McCollum believes that commercial real estate has a greater potential than residential housing to negatively impact the state and national economies over the next four years. Nearly $1.4 trillion in commercial real estate loans will reach the end of their terms between 2010 and 2014, and may trigger defaults, according to a February report of the Congressional Oversight Panel.
That could trigger economic damages to financial institutions, small business and families across the nation, McCollum said.
Other large states with similar demographic and growth issues already have put laws in the book that could ease the pain of commercial foreclosures. McCollum believes Florida should look at those laws to emulate.
One example of the laws passed in other states is the “one action” rule where all claims can be consolidated into a single action or prohibit lawsuits seeking relief from borrowers personally before proceeding against the collateral, he said. Other laws seek to establish a clear methodology for deficiency judgments, right of redemption and foreclosure defenses so that there are no ambiguities in the process.
Posted by Scott R. Lodde