Aug. 23, 2007 - With this year and next shaping up as the best ever for the lodging industry -- although Memphis isn't doing that great -- lodging industry operators had their eye on some future yellow flags Wednesday.

Randy Smith, chief executive officer of Smith Travel Research of Nashville, predicted 2007 will be "the most profitable year ever for the hotel industry."

Speaking Wednesday at the fifth annual Memphis Lodging Industry Summit, he said 2008 may be even better.

But numbers this year are showing signs that demand for hotel rooms isn't keeping up with the modest growth -- about 1.5 percent -- in the number of hotel rooms, he said.

Although demand grew in five straight months through July, gains were small, Smith said.

In Memphis, 2006 was a strong year, but so far this year, room demand is down 3.3 percent while there are 0.7 percent more rooms.

One development that may help the supply-demand equation is the time to get a hotel open from the start of construction is lengthening. From construction until the first guest arrives is 19 months, compared to 12 months in 2000, Smith said.

Construction costs are rising, as well -- about 3.8 percent this year, said Stephen Perkins, principal in ForrestPerkins, a hotel design firm. In talking about an International Society of Hospitality Consultants capital expenditures study, Perkins said steel, cement and labor costs spiked, but lumber prices have fallen.

The trends should allow operators to continue raising room rates, Smith said.

"It's particularly enjoyable right now," said Robert Steele, chairman of the American Hotel and Lodging Association (AHLA) and general manager of Grand Hyatt Tampa Bay.

He sees 7 to 10 percent revenue growth for hotels and record profits as well.

Steele, who was born, raised and started in the hotel business in Memphis, flashed some caution lights for the future.

Costs are rising, he said. An increase in the minimum wage will push up hotel workers' pay; energy expenses are on the rise, and amenity creep -- travelers want Internet access, premium beds and such -- adds to costs, Steele said.

Airline fuel and gasoline expenses are rising, which makes travel more expensive, he said.

Hotels face competition from cruise lines. And fear of terrorism and concern about diseases such as bird flu, cut travel, he said.

"The No. 1 concern I have for the industry is the labor market," said Rick Kelleher, chief executive officer of Pyramid Advisors, a Boston hotel company.

"Every hotel operator in the world I know of has undocumented (immigrant) workers or partially undocumented," he said. "As the government cracks down and with the low unemployment rate in major cities, we have trouble getting and keeping high-quality workers."

He estimated undocumented immigrants at 25 to 30 percent of hotel staffs in major cities.

Hotel officers do the best they can to check the status of workers. but they're not private investigators, said Donald Fay, president of Commonwealth Hotels in Covington, Ky.

Often, operators don't find out the status of workers "until the INS (Immigration and Naturalization Service) is rumored to come and your housekeeping staff doesn't show up," he said.

The AHLA rates comprehensive immigration reform laws of the kind Congress nearly passed this year as a top priority, said Marlene Colucci, executive vice president of public policy.

Without immigrant workers, especially in seasonal jobs that Americans won't take, she said, "you have to shut down or cut back on services."

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