THE HOTEL BUSINESS ALREADY was faltering in the third quarter of 2001. Then, as the boom of the 1990s ran out of gas, the Sept. 11 terrorist attacks precipitated what could be considered the industry's darkest hour: On Sept. 16, 2001 — following a shutdown in the airline industry — nearly two-thirds of all hotel rooms in the U.S. were empty.
The double whammy of air-travel concerns and the ongoing recession devastated the industry in the weeks immediately following the attacks. By May 2002, occupancy levels were back up to 61.4%, down slightly from 62.6% in May 2001. But revenues have been slower to rebound — revenue per available room (RevPAR) registered $51.32 in May of this year, down 5.2% from $54.11 in May 2001.
Behind those figures lurk even more alarming statistics: Smith Travel Research has identified 15 cities that have been particularly hard hit and may experience a longer recuperation period than other U.S. markets. As of April, RevPAR in these 15 markets had sunk a whopping 16.7% over the previous year, compared with the rest of the markets in the U.S, which experienced a RevPAR decline of only 3.8%.
The 15 markets are major business or tourism centers — sometimes both — and they tend to be more dependent on air travel than most other U.S. cities, says Smith Travel President Mark Romano. Not surprisingly, New York and Washington, D.C., the two cities targeted in the terrorist attacks, are on the list. The other markets on the list are Atlanta, Boston, Chicago, Dallas, Detroit, Honolulu, Las Vegas, Los Angeles, Miami, Orlando, Fla., Phoenix, San Francisco and San Jose, Calif.
These markets posted significantly lower 12-month cumulative RevPAR figures for the period beginning in June 2001 and ending in May 2002.
Smith Travel reports that occupancy levels for these 15 markets dropped to a weekly average of 52.1% in the week of Sept. 16 through 22, down 26.2% from the same week in the previous year. Average daily room rates (ADR) registered $74.29, a 15% decrease from the same week in 2000. RevPAR slid from $61.77 to $38.73, a 37.3% decrease.
Although the terrorist attacks had a huge impact on the hotel sector, the industry already had been feeling the crunch of the downturn in the U.S. economy as early as March 2001.
In the weeks after Sept. 11, a fear of airline travel was the biggest reason for the hotel industry's troubles. Jack Corgel, managing director of applied research for Atlanta-based Hospitality Research Group, a division of PKF Consulting, says that the recession, rather than post-Sept.11-related concerns, is now the chief reason for the decline in air travel.
“The air travel stigma has fallen to a bare minimum,” Corgel says. “What's largely happening now is people are behaving based on what's in their pocketbooks, not what's in their heads.”
How long will it take the 15 markets to return to good health? The road to recovery will be longer for some markets than others. Romano notes that it may take five years for San Francisco and Boston to recover, and steady increases in room rates would need to follow rises in occupancy for the markets to rebound. With its occupancy levels nearing pre-Sept. 11 levels, New York's revenue and room-rate challenges are expected to be resolved in two to three years, he says.
The Hotel Research Group, meanwhile, predicts that most of the 15 markets will have to wait until third-quarter 2003 for revenues to return to 1999 and 2000 levels. In 1999, RevPAR averaged $65.65 nationwide (in the 50 major markets tracked by the firm). Revenues then jumped to $69.70 in 2000 before falling to $62.34 nationwide in 2001, a 10.6% decrease over the previous year. The firm expects RevPAR to decline still further this year, to $61.41, a 1.5% decrease from 2001.
Nationwide, Smith Travel is predicting modest revenue increases over the next year. The firm forecasts that ADR in 2002 will rise by 2% over last year, and then increase by 3.5% in 2003. Meanwhile, the firm expects RevPAR will rise 2.3% in 2002 compared with last year, and then increase 4.5% in 2003.
The East Coast Stumbles
New York's hotel market staggered in the immediate wake of Sept. 11, but tourists and business travelers alike have returned to Big Apple hotel rooms. Smith Travel figures show that in May 2002, New York occupancy levels had bounced back to 76.3% — down just 1.3% from 77.3% in May 2001 — but revenues are rebounding at a slower rate. RevPAR figures fell from $150.64 in May 2001 to $134.36 this May, a 10.8% decrease.
The dip in RevPAR is more a factor of a reduction in room rates rather than an occupancy problem, according to Tom McConnell, a managing director for New York-based Insignia/ESG. “A lot of the 9/11 effects have worn off to a great degree,” he observes, noting that the lower room rate figures — $176.10 in May 2002 compared with $194.88 in May 2001 — are a result of hotels lowering rates to entice guests back into the rooms.
Analysts say New York — and other major markets — will be able to raise rates slowly the rest of the year as demand improves.
Government spending is fueling a rebound in Washington, D.C.'s hotel market. According to Randy Smith, chairman of Smith Travel, Washington lost visitors in the fourth quarter of 2001, due mainly to security concerns and the inconvenience caused by the closure of Ronald Reagan Washington National Airport. However, the Washington Convention and Tourism Corp. reports that tourists returned this spring. In May 2002, RevPAR in Washington was back up to $93.35, but still down 4.6% from $97.80 in May 2001.
In Boston, the hotel market is suffering from overbuilding. Projects that went into development when the markets were soaring created a 4.9% increase in room supply from May 2001 to May 2002, a result of planning during the tech boom. In May, RevPAR was $105.66, a 15.2% decline from $89.58 in May 2002.
To the south, Atlanta is suffering along with other business centers dependent on air travel, with RevPAR declining 13.5% — from $52.95 to $45.78 — from May 2001 to the same month this year. Philadelphia — a city less reliant on air travel due to its proximity to New York and other major business centers — escaped inclusion on the list of 15 markets. RevPAR actually increased from $73.76 to $75.89 in those months.
Tech and Travel Woes in California
The West Coast's dependence on the technology sector took its toll, particularly in northern California, where many tech companies went bust and contributed to skyrocketing office-vacancy rates — and a decline in business travel.
In the San Jose, Calif., hotel market, RevPAR fell from $86.52 in May 2001 to $65.77 this May, a 24% drop. The heart of the Bay Area didn't fare any better, with RevPAR plunging 27.7% in San Francisco, from $114.92 to $83.13.
Construction of new hotels will be minimal in the meantime — which will help the market recover. “There are quite a few hotel sites (in San Francisco) that are ready to go, but the developers can't get the financing,” says Jeff Roe, a managing director in the San Francisco office of Insignia/ESG.
In Southern California, the downturn has been less extreme for Los Angeles, with RevPAR falling from $68.93 in May 2001 to $63.97 in May 2002, a 7.2% decline. The market is doing better than San Francisco's, thanks largely to an economy that is less tech-focused. San Diego is doing better than its California neighbors, perhaps due to a strong military presence and a healthy convention business, says Roger Story, the national director of hospitality at Ontario, Calif.-based Sperry Van Ness. RevPAR in San Diego declined from $75.87 in May 2001 to $73.05 in May 2002, a drop of only 3.7%.
Hanging on in the Heartland
Although hotel revenues are down in Chicago, locals remain bullish. “Chicago is and will continue to be a world-class leisure destination — and that is going to strengthen the city's recovery from the recession,” says John Karver, senior managing director in the Chicago office of Insignia/ESG.
RevPAR dropped 14.1%, from $83.48 in May 2001 to $71.73 this May. Due to the down market, investors are choosing to limit potential new room supply in Chicago.
After Sept. 11, John McLinden, principal of Centrum Properties, put aside discussions with New York hotelier Ian Schrager to build a boutique hotel in the former Montgomery Ward Co. headquarters building. Instead, Centrum is now proceeding with a 100% residential redevelopment of the building. “Chicago doesn't need another luxury hotel right now,” McLinden says.
Vacation Hot Spots
Places where travelers go to “get away from the world” can find themselves at a disadvantage when airline travel becomes less attractive due to travel fears or security hassles. The country's largest vacation hot spots are using their own unique marketing initiatives to recover from the woes of 2001.
In Las Vegas, visitor volume was down only 2.3% in April 2002 vs. the same time in 2001, according to the Las Vegas Convention and Visitors Authority. This is an encouraging contrast to last fall's double-digit decrease in visitor volume for the four-month period following Sept. 11. The convention authority attributes the comeback in part to a 12% increase in auto traffic to Las Vegas from April 2001 to April of this year, which has countered the airline passenger traffic decrease of nearly 8%.
Despite the positive visitor figures, RevPAR in Las Vegas registered $64.48 in May of this year, a 6.5% drop from $68.98 in May 2001. Harry Pflueger, managing director in the Newport Beach, Calif. office of Insignia/ESG, cautions that planned additions of more than 1,000 rooms at the Mandalay Bay and the Venetian Hotel could hamper the market's recovery.
“Las Vegas occupancy levels are vulnerable when new rooms are added to existing supply without the hype, promotion and attraction of a new theme,” he says.
Signs of a rebound already are apparent in Orlando, Fla. RevPAR this May registered $55.81, down only 3.4% from $57.79 in May 2001. The city's more glamorous neighbor to the south, Miami, isn't recovering as quickly because of its greater dependence on visitors who travel by plane, particularly European visitors. RevPAR in Miami registered $58.31 in May 2002, a decrease of 12.6% from $66.68 in May 2001.
In Phoenix, RevPAR dropped 12.5% to $50.61 in May compared with $57.83 in May 2001. Honolulu and Oahu Island experienced a 5.4% decrease in RevPAR, dropping from $79.40 to $75.07. Barry Mansur, chairman of Chicago-based Mansur & Co., which owns hotels in several markets, believes a decrease in airline traffic to the island is partly to blame.
Conversely, regional leisure destinations such as the Wisconsin Dells, Asheville, N.C., and Destin, Fla., receive more visitors who travel by car than by plane. Consequently, those markets have not suffered as much as their big-city counterparts. Ed Croom, president of St. Charles, Ill.-based Janko Hospitality, reports that the company is in expansion mode in its small, tertiary markets.
“The largest market in which we operate is Peoria, Ill.,” he says. “The majority of our properties have performed either on par with, or exceeded, last year's totals, which in turn exceeded 2000.”
Weathering the Storm
Despite the weak market, low interest rates and low debt-to-equity ratios have prevented the mass of foreclosures that occurred in the recession of the early 1990s.
“People expected to see a devastating bailout, but that hasn't happened,” says Story of Sperry Van Ness. “Today's operators have been in business a long time, have deep pockets and, most importantly, their properties have been responsibly financed.”
McConnell of Insignia/ESG notes that the gap between buyers and sellers of hotel properties began to shrink in the second quarter of this year, and investment dollars are beginning to find opportunities in hospitality projects. That's partly because hotels are benefiting from a broad change in strategy, as many investors are moving equity from the uncertain stock market to real estate, he says.
The Bottom Line — Returning to Profitability
Hotel experts emphasize that the industry will have to be patient because revenues will not rebound as fast as occupancy rates.
“The average hotel manager will sell more rooms overall this year than last,” says Mark Woodworth, executive managing director at the Hotel Research Group. “However, these rooms will be sold at a lower price point, and the typical manager will incur more costs because of the higher occupancy.”
On the bright side, Smith Travel reports that industry profits last year totaled $16.7 billion. While that number was down from $22.5 billion in 2000, and $22 billion in 1999, it's a long way from the recession figures of 1990, when the industry lost $5.7 billion.
Most insiders are confident that the hotel industry as a whole is regaining its stride. McConnell predicts, “This fall will be telling. Everyone is keeping their fingers crossed, but I don't see any black clouds on the horizon.”
Margy Sweeney is a Chicago-based writer.
TOP HOTEL MARKETS STRUGGLE
|Source: Smith Travel Research|