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Geller: Rest Assured the Hotel Industry Will Survive This Down Cycle

History repeats itself, which means there is a light at the end of the tunnel for struggling hoteliers, according to Laurence Geller. The president and CEO of Chicago-based Strategic Hotels & Resorts remains an optimist amid a softening global economy.

And that’s no small feat. Total returns for U.S. lodging REITs are down nearly 24% year-to-date through August 18, according to the National Association of Real Estate Investment Trusts. The stock price of Strategic Hotels (NYSE: BEE) has been particularly hammered. The stock closed on Monday at $8.95, down from its 52-week high of $22.74. That’s a 60% drop.

Weak consumer confidence, a rising unemployment rate, and inflationary pressures punctuated by a major rise in the price of fuel since the start of the year have cut into demand for U.S. hotel rooms. Demand is forecast to decline 0.1% while supply growth remains moderate.

“So what? Manage it, get over it, don’t look backwards, look forwards,” remarked Geller during a keynote address at the Midwest Lodging Investors Summit held at the Sheraton Chicago Hotel & Towers in mid-July. Approximately 500 attendees including owners, operators, developers and brand managers were in attendance.

The legendary speaker and native Englishman — who also happens to be a Winston Churchill buff and co-chairman of Trustees of the Churchill Centre based in Chicago — started off with an anecdote about the Lion of Britain. The story is set at the end of World War II when Churchill was thrown out of power, and consequently fell into a depression.

Worried over his mental state, Churchill’s wife, Clementine, finally said, “Winston, for God’s sake, snap out of it. Look at this as a blessing in disguise.” Churchill’s response: “If so, Clemen, it’s very effectively disguised.”

The anecdote was particularly apropos given the current state of the lodging industry. “We’ve got airlines dropping their mileage theoretically 14% to 15%,” said Geller, referring to the reduction in seat capacity. “We’ve got consumer confidence at an all-time low. Business confidence is also low. Construction prices have gone up. The Fed is worrying that it’s got enough money to fund every bank that’s going down. Credit is unavailable and the dollar is weak.”

Despite all the uncertainty and impending sense of doom surrounding the U.S. economy, the good news for the hotel industry is that the forecast growth in room supply is modest. According to PKF Hospitality Research, hotel room supply in the U.S. is projected to rise 2.5% this year and climb 2.7% in 2009.

Geller noted that once the new supply is absorbed, it will be difficult for hotel developers to add more rooms because debt financing remains hard to come by and the cost of building hotels has become prohibitive. That will help the industry stabilize.

Nearly half of the 864 hotels slated to open this year are in the limited-service segment, according to Smith Travel Research. But is there heightened demand for Hampton Inns or Cambria Suites? “Yes, there is more stuff coming around the corner, but much of it is replacing stuff that is, or will be, obsolete. Obsolete not because it’s necessarily that old, but because the product doesn’t work for the market,” Geller explained.

Industry professionals might also take comfort from past economic cycles, said the CEO, who likened the savings and loan crisis of 1991-1994 to the present credit crunch and global economic slowdown. “The S&Ls were a problem, credit was an issue, [borrowers] couldn’t get any money, blood was on the streets. You had a lot.” Foreclosures were also rampant.

What happened? “Double-digit growth in RevPAR (revenue per available room) afterwards and a period of incredible boom until we had dot-com mania, too much hype, secondary investments, Wall Street lending everything to everybody and then we had 9/11,” said Geller.

Geller shied away from predicting when the current downturn will end, but he emphasized that the bench strength of hotel management is strong today. Managers are savvier than they were between 2001 and 2004, when hotel rates were slashed and roughly 40% of supply was handed over to Internet suppliers to set pricing.

“The theory is that if you achieve less than 3% RevPAR growth, your margins go south,” said Geller. “I don’t believe it. I believe the systems are in place — should managers choose to use them — to manage labor, to manage energy better. You can manage margins, and I believe the chains get it and I believe they’re going to do it.”

The current downturn will not change the wants and needs of the Baby Boomers or Gen-Xers, who will find a way to continue their travels, Geller insists. The weakened economy will not be able to stop the ever-expanding globalization of corporations, which also boosts demand for hotels.

“We will find new economic models,” Geller insisted. “Maybe there will be an energy boom to replace the dot-com boom with all the alternative energies. Wall Street bankers can’t go very long without bonuses — they’ll invent some other product.”

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