April 30, 2010 - In Q1, hotel operations showed continued improvement, with more positive gains in demand and occupancy than initially expected. The economy has improved, as GDP has bounced back significantly in the last two quarters. Job losses are declining, causing unemployment to marginally subside. An economy continuing to strengthen should be able to withstand the anticipated declines in stimulus programs scheduled for the second half of 2010.  With increasing demand, room rates should begin to improve in Q2, causing RevPAR to register positive gains and putting the industry more firmly on the road to recovery.

The banking crisis continues to weigh heavily on the industry, affecting both transaction activity and the ability of construction projects to acquire financing. There is ample evidence that distressed real estate loans will soon begin to be resolved at a faster pace. Having curtailed lending, with a strong economic and stock market recovery as a tailwind, and with low central bank borrowing costs, lenders have substantially rebuilt their balance sheets. Many are now reporting operating profits. Toward the end of 2010 and into early 2011, there should be increased activity in loan sales, foreclosures, individual transactions and an uptick in M&A activity. With many assets coming to market at discounted prices, there should soon be a wealth of opportunity for investors who can access debt and/or equity. The industry will enter a period where it will be cheaper to purchase existing hotel assets than to build new ones.

For now, there are few hotel transactions. According to LE�s recent Sales & Pricing Trends Report, only 411 fee simple sales took place in 2009 that were reported in the public domain. That is a 75% decline from the peak volume year in 2007. At $58,296, 2009�s average selling price per room was also at a cyclical low. Transaction activity in Q1 2010 continues to show YoY volume declines.

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LE�s Forecast for New Hotel Openings
LE�s Forecast for New Hotel Openings puts gross supply growth for 2010 at 1.7%, which is less than other industry predictions. LE projects 715 hotels/ 80,830 guestrooms will open in 2010. This is a dramatic fall-off from 2009, down 54% by hotels and 55% by rooms. In 2011, LE expects 654 hotels/63,141 rooms to come online for a gross growth rate, before hotel removals from the census, of 1.3%. Seven consecutive quarters of rapid Pipeline declines are having a substantial impact on the number of new hotel openings going forward. With less supply to be absorbed, growing demand should lead to faster room rate improvement and further accelerate the industry�s recovery.

Construction Pipeline
At 3,395 projects/396,797 rooms in Q1, the total Construction Pipeline has fallen below 400,000 rooms for the first time in four years. Totals have now decreased 42% by projects and 49% by rooms from the Q2 2008 peak. Though the QoQ rate of decline is slowing, Pipeline counts are inexorably descending toward the 300,000-room mark, perhaps penetrating that threshold early next year. New Project Announcements into the Pipeline continue at low levels for a combination of reasons: a trough-like operating environment, the inability to secure financing and the prospects for a more attractive investment opportunity through the acquisition of existing assets.

Pipeline Highlights