The banking, housing and economic crises have taken a toll on Americans' financial health, forcing consumers to curtail leisure and business travel. U.S. hotel occupancy in January was 45.9%, down from 51.5% in January 2008. Revenue per available room (RevPAR) in January was 15.3% lower than the same month a year earlier.
Veteran hospitality researcher and educator Bjorn Hanson says that U.S. hotel demand is in a retrenchment mode with consumers' discretionary income under attack. Corporate America also is feeling the pinch and slashing travel budgets. Even when U.S. gross domestic product (GDP) starts growing again, hotel demand will fail to keep pace, he believes.
Hanson, who founded the leisure and hospitality practice for consultant PricewaterhouseCoopers, left the firm in 2008 after 18 years. Today he is a professor at New York University's Tisch Center for Hospitality, Tourism and Sports Management. NREI spoke with him about the state of the industry.
NREI: Many hoteliers insist that the downturn in the hospitality sector is cyclical and that there is no paradigm shift in demand. Why do you disagree?
Hanson: Consumer confidence will recover, but not to where it was. Consumers' sense of [financial] security, and therefore how much they have available for discretionary spending, has been changed for at least a generation. I don't think that it's cyclical. It happens that we have a number of cyclical forces in play at the same time that are making the situation even worse.
I feel very confident that this [economic crisis] has taken us through another total change in the perspective about travel. At the same time, travel has become more expensive and less convenient. No matter how nice a hotel is, if the experience getting there is something between neutral and awful, that's another disincentive for travel.
NREI: Isn't there a limited benefit to corporations using video conferencing, webinars and other tech tools in lieu of travel?
Hanson: I agree, but in 2010 even if we get back to 95% of the activity level that we had before the downturn, that's a 5% loss in incremental business. That shows up as a dramatic change in industry performance because it affects not only occupancy, but also rate.
NREI: What advice do you give hotel owners and investors in this market?
Hanson: We need to reset our expectations. Most owners a year ago would have said that the IRR (internal rate of return) for hotel investment needed to be between 18% and 24%. That's unrealistic today. Hotels can still be very good investments. When Treasury bills are paying under a 1% return, to be getting an 8%, 10% or 12% return is very favorable.
NREI: Is there any good news to report in the hotel sector?
Hanson: In 1990, occupancy nationally was nearly 64% and the industry lost $5.7 billion. In 2008, occupancy was 60.4%, yet industry profits were more than $20 billion (based on preliminary estimates). With nearly 4% lower occupancy, the industry was at least $25 billion more profitable. The hotel industry finances itself more conservatively today. We've used technology for staffing, setting rates, and replacing jobs. We have a totally different industry.