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Hotel Industry Stops Bleeding

Jan Freitag, vice president of Henderson, Tenn.-based Smith Travel Research, did his best to put a good spin on the state of the hotel industry in his presentation yesterday at the Hunter Hotel Conference in Atlanta. His attempt at optimism wasn’t necessary, however, as most of the attendees and speakers believe the lodging business has touched bottom and is on its way back—slowly, to be sure—to recovery.

“It was a long, cold winter in 2009 and ’10, but spring is in the air,” said Freitag, during an industry data presentation. “The good news is there is less bad news. The construction pipeline is emptying and demand is slowly improving. The big question that remains is what happens to rates.”

As Freitag demonstrated, transient occupancy is “roaring back but group business is still in a critical but stable position.” Rates in the group market also are a problem.

Smith Travel’s 2010 forecast calls for flat occupancy and a 3.2% drop in both rates and revenue per available room (RevPAR). Next year, occupancy and rates will rise by about 2% with RevPAR up 4.2%. The forecast differs by market segment, with economy properties faring the worst, with RevPAR forecast to be down 6.7%. In contrast, midscale hotels without food and beverage are projected to have the best year, with RevPAR down only 1.2%.

Freitag also focused on these two segments to explain the downturn in supply growth: The midscale without food and beverage development pipeline, while down 32% from last year, still contains 115,000 rooms under development. The economy pipeline is much less robust, with just 9,000 rooms, down 55% from the year before.

While the news is good on new supply, the pace of average daily rate (ADR) increases will ultimately dictate how fast the hotel industry recovers. “It took the industry seven years to recover from the rate decline following 9/11,” said Freitag. “We’re facing the same scenario now, which will continue to squeeze profits.”

Rate increases follow improvements in demand, and Freitag said it takes 2% demand growth each quarter in order for rates to increase by the inflation rate. One depressing slide from Freitag showed that had ADR increased by CPI since 2007, it would reach $108.91 by the end of 2010. The Smith Travel forecast calls for this year’s ADR to only reach $94.39.

In a presentation that followed, Mark Woodworth, president of Atlanta-based PKF Hospitality Research, focused on the impact forecasted hotel industry performance can have on capital availability and investment opportunities. According to Woodworth, the lack of liquidity in the capital markets and the absence of income growth lifted capitalization rates to a cyclical peak in 2009. However, he said rising industry profits and reduced risk premiums should overcome escalating interest rates, resulting in cap rate compression.

“Although the cumulative loss in hotel asset value has been substantial since 2008, significant asset appreciation should commence in 2008,” Woodworth said, “and persist through 2014 as cap rates fall further in response to stabilizing incomes.”

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