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Weak GDP Forecast Puts Strain on U.S. Hotel Market

NEW YORK — As gross domestic product goes, so goes the U.S. hotel industry. The two are inextricably linked. Just ask J. Willard Marriott Jr., chairman and CEO of Marriott International Inc., who in his illustrious career has weathered at least six economic downturns.

“If GDP comes back up to 2%, we’ll have some good growth in RevPAR [revenue per available room]. If it doesn’t, then we will not. And I think that’s the key,” Marriott remarked during Monday’s opening CEO panel at the 30th annual New York University International Hospitality Industry Investment Conference at the Waldorf=Astoria.

By that measure, the hotel industry will likely be facing some headwinds. Both Standard & Poor’s and The Economic Outlook Group call for real GDP in the U.S. to rise 1.3% in 2008. What’s more, S&P’s chief economist David Wyss expects real GDP in 2009 to hold at 1.3%. Wyss says the U.S. economy has moved into recession, but that it should be a mild one due to the fiscal and monetary stimulus.

Bernard Baumohl, executive director of The Economic Outlook Group, is slightly more optimistic about the prospects for 2009, when he expects the U.S. economy to grow at an annual rate of 2.4%.

To put those forecast figures into context, the average annual growth of real GDP from 2004 to 2006 was 3.2%. In the first quarter of 2008, the economy grew at an annual pace of 0.9%. Such anemic growth is raising some red flags among hoteliers.

“The concern of course is how the price of oil is impacting the airlines, how it’s impacting the consumer,” Marriott said. “So there is a lot of uncertainty out there, but I’ve been through this before and we always come out of it.” Whether it’s a V-shaped economic recovery or a more protracted one remains unclear, Marriott added.

Barry Sternlicht, chairman and CEO of Starwood Capital Group, believes that a confluence of economic factors will challenge the hotel industry and will inevitably lead to price discounting. “The U.S. consumer is stretched and we’ve been waiting for him to collapse for quite some time. I think that he’s going to hit the wall,” says Sternlicht.

“I really think businesses will do what they’ve always done in every cycle — they’ll tighten their belt. [Hotel] occupancies have been dropping for almost two years now and yet flags have been able to raise rates fairly aggressively in the face of declining occupancy. That’s not a recipe for long-term success. And usually somebody breaks the ranks and starts cutting rates,” adds Sternlicht.

The price discounting is already under way in Las Vegas, Sternlicht points out, even before a wave of new room supply is expected to hit the market. Marriott agrees that the pressure to discount room rates industrywide will increase. “We expect [the big customers] will be pushing hard for discounts, but right now there is very little.”

Still, the hotel industry fundamentally has been able to figure out how to make money amid a downturn, emphasizes Sternlicht. “The good news is if you could be up 3% to 5% [in revenue] in a global slowdown or recession, or even break even, it’s a lot better than what you are seeing out of the retail industry, or the airline industry, or the car industry.”

Indeed, Hendersonville, Tenn.-based Smith Travel Research forecasts revenue per available room, or RevPAR , to drop to 2.9% in 2009 following growth of just 3% this year.

Sternlicht doesn’t anticipate the credit crunch to dissipate anytime soon. “The banking system is in dire straits. This is global, there are huge problems in the banking market.”

Jonathan Gray, senior managing director and co-head of the real estate group for The Blackstone Group, emphasizes that investors need to proceed with caution in this environment in light of a depressed housing market, the credit crunch and the negative effects high gas prices are having on the airline industry. “Hard asset values in an inflationary environment will go up. I don’t think this [economic downturn] is a snap back. I think we’re going to have to ride through this for awhile.”

What’s surprising to Gray is that the U.S. hotel industry has performed as well as it has in the face of so much adversity. He points out that the weak dollar is actually a positive sign for gateway cities like Orlando, where foreign tourists can get a lot more bang for their currency.

The weak dollar clearly has given a boost to U.S. exports too, but Wyss of S&P says weaker overseas growth will mean less benefit from the trade deficit, despite the declining dollar.

Conference organizers say 2,400 industry professionals registered for the two-day event, a record turnout.

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