KPMG Peat Marwick LLP

News

FOR FURTHER INFORMATION:

Frank Moon
Director of Communications
(312) 938-5071

FOR IMMEDIATE RELEASE
JUNE 14, 1996

CHICAGO, JUNE 14, 1996 -- Five major trends today shape the face of the hospitality industry tomorrow, according to KPMG Peat Marwick LLP's National Hospitality Practice. The Practice anticipates these trends to have tremendous influence on the lodging industry in the near term, and may lay the foundation for innovation and future business opportunities down the road.

According to KPMG, the five major trends that the industry must focus on include: 1) the aging "baby boom" generation; 2) the institutionalization of hotel ownership; 3) the globalization of business; 4) developments in telecommunications and technology; and 5) the shifting economic cycle. That's the word from the summer issue of The Real Estate Report, a newsletter published by the National Real Estate Practice of KPMG and distributed to more than 20,000 real estate professionals nationwide.

"The lesson to be learned from hospitality's hearty rebound is that this is a dynamic industry characterized by fast-paced change. And those individuals with the foresight to anticipate and capitalize on market trends in their early stage of development will be the most successful," said Frank Nardozza, national director of KPMG's National Hospitality Practice.

The Aging "Baby Boom" Generation

"Nearly every major U.S. industry -- including hospitality -- has identified market opportunities related to the aging `baby boom' generation; yet the hospitality industry is one of the few industries that has yet to create a brand segment or major niche market dedicated to this group," Nardozza said.

According to KPMG, the "baby boom" generation represents approximately 78 million individuals who will move into the "over 50" category within the next decade, creating a major marketing opportunity for all industries, including hospitality.

Some hotel chains have geared marketing campaigns toward aging boomers, such as Hilton Hotels "Senior Honors Program" which offers discounts and special privileges to adults over 60, but Nardozza cautions that the hospitality industry may not be doing enough to target this market. Entire product segments for this group have been created by other industries, such as housing and health care, which have developed retirement lifestyle communities, vacation home communities, empty- nester communities and assisted care facilities targeting both active and non-active seniors.

The Institutionalization of Hotel Ownership

"Hotel ownership has shifted dramatically over the past several years with a buying binge that has resulted in large concentrations of hotel assets in the hands of a relatively small number of major portfolio investors," Nardozza said. "This institutionalization of hotel ownership is changing the way the business of lodging is conducted with greater emphasis being placed on the combination of real estate savvy with investment-style decision making."

This new breed of owners, which consists of large, well-capitalized hotel companies, REITs, pension funds and investment funds, has extensive expertise in the capital markets and financial management, is expanding uses of technology, and is developing sophisticated asset management capabilities. "Innovative service providers and deal makers can reap significant benefits by meeting the capital and service needs of these new giants," Nardozza added.

KPMG's Hospitality Practice expects industry consolidation to continue with the `bigger is better' philosophy that has taken hold as a result of the institutional investors' desire to diversify risk, reap economies of scale and achieve overall lower costs of capital. Consolidation also will result in the continued refinement of operational strategies, redesign of business processes and functions to maximize efficiencies. For example, last year Marriott International purchased a 49% interest in Ritz Carlton, and already Ritz is taking advantage of Marriott's extensive resources and vendor discounts.

The Globalization of Business

The globalization of businesses and economies is a trend that has taken hold in the 1990s and will continue for many years to come. Increased international travel and numerous opportunities in emerging markets should trigger corporate desires to expand globally and create global brand identities. In addition, international expansion offsets diminishing opportunities in the U.S., offers considerably greater operating margins and meets pent-up demands in emerging markets.

"Countries newly embracing democracy and free enterprise are welcoming foreign investment, which bodes well for increased cross- border investments and global expansion in the lodging industry," Nardozza said. "Hotel investors and hotel chains seeking opportunities for brand expansion should consider hugely underdeveloped consumer and travel markets, such as Latin America, Southeast Asia and China."

Latin America, in particular, has been the beneficiary of attention of late with a number of U.S.-based hotel companies expanding into the market. "Major hotel company presence in the region has been confined largely to large hotels in gateway cities or resort areas, resulting in pent-up demand in most Latin American markets. But recent political, economic and regulatory reforms enacted throughout the region are creating extraordinary expansion opportunities for a broader spectrum of hotel product in a broader variety of markets," Nardozza said.

While emerging markets offer the most potential, opportunities also exist in the recovering European market, which is mostly saturated but continues to offer niche-specific opportunities. Industry participants should watch for a greater concentration of four-star hotels owned by fewer companies, the extension of brand and marketing alliances, and budget/limited service hotel growth throughout Europe. The U.K. has experienced the strongest recovery, and opportunities in London are particularly strong with the expected conversion of offices into hotels and expected growth among townhouse hotels by the turn of the century.

New Developments in Telecommunications and Technology

"The sweeping changes occurring in telecommunications and technology hold significant implications for the hospitality industry -- both positive and negative," Nardozza said. "The industry must broaden its use of telecommunications and technology to reach consumers directly and service them efficiently. It also must address new challenges presented by technological advances that may restrict opportunities." Nardozza cited desktop video conferencing, which could reduce the need for out-of-town business meetings, as an example of the negative impact technology may have on the industry.

On the good side, the Internet is providing significantly increased opportunities for the technologically adept. According to the Practice, the Internet should be foremost in everyone's mind with main line businesses and consumers logging on in greater numbers every day. The Internet allows hotel companies to by-pass travel trade intermediaries and reach consumers more directly and efficiently, which could deepen the "brand lock" companies have on consumers.

With the institutionalization and public market ownership of real estate, software advances will help meet the increasing need for more effective and comprehensive property and portfolio reporting and monitoring. The Practice warns that owners must capitalize on software offerings to remain competitive and service providers must continually refine products to meet those increasing demands.

To help meet changing market demands, KPMG's National Real Estate and Hospitality Practice recently formed a strategic alliance with Dyna Software & Consulting, Inc. The alliance was designed to unite KPMG's real estate consulting services with Dyna's analytical software products to provide a comprehensive real estate asset management solution.

The Shifting Economic Cycle

According to KPMG, the shifting economic cycle is making it difficult for industry participants to determine whether it is time to buy or sell hotels. The Practice expects the growth cycle in the lodging industry to flatten or dip over the next two years after experiencing four solid years of recovery; however, there exist many pending factors that ultimately will determine the direction of the economic cycle.

"Hotel occupancies and room rates are reaching an all-time high and property values within most lodging segments are coming closer in sync with property replacement costs," Nardozza said. "But economists can't agree on whether inflation or recession is lurking around the corner. Complicating matters, tax reform could impact the current cycle, depending upon what happens with the capital gains rates and the flat tax proposal.

The story of big gains through property turnarounds may be over for the near term, making it likely that high yield investors will dispose of their hotel investments. However, investors looking for more stable and predictable returns will continue to buy hotels, particularly large institutional investors."

KPMG Peat Marwick LLP

As a leading business advisor to the real estate and hospitality industry, nationally as well as internationally, KPMG Peat Marwick LLP's Real Estate, Hospitality and Construction Practice provides a full range of integrated consulting, taxation and auditing services to clients in commercial and residential real estate, hospitality, construction, REIT and REMIC industries, as well as real estate portfolio investors. Some of the services the Practice's professionals provide their clients throughout the globe include portfolio management, performance improvement, acquisitions and dispositions, capital strategies, technology, strategic business planning, valuations and investment analysis.

KPMG Peat Marwick LLP, the U.S. member firm of KPMG, is The Global Leader[SM] among professional services firms. KPMG has more than 6,000 partners and 76,000 professionals serving clients through 1,100 offices in 134 countries. In the U.S., KPMG partners and professionals deliver a wide range of value-added consulting, assurance and tax services in five markets: financial services; manufacturing, retailing and distribution; health care & life sciences; information, communications and entertainment; and public services.

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