CHICAGO, July 30 -- Although 1997 is shaping up to be another record year for the lodging industry, potential new developments on the horizon, including significant new supply, a slowdown in the U.S. economy anticipated within the next five years and the possibility of a Wall Street retreat, potentially may derail the present lodging growth cycle. These observations are found in the summer 1997 issue of The Real Estate Report, an industry newsletter published by the National Real Estate Practice of KPMG Peat Marwick LLP. The quarterly publication is distributed to more than 20,000 real estate and investment professionals nationwide. "The lodging industry has reached a critical crossroad," said Frank Nardozza, partner and national hospitality industry director. "Looking ahead from the top of the present business cycle, it is crucial we understand the factors that may cause the next downward cycle -- however far off it may be."

Lodging Industry Remains Strong in 1997

Through the first-half of 1997, industry-wide profits remained very strong, reported Nardozza. Profits are likely to equal or exceed the $10.5 billion record level set in 1996 for the present calendar year. Also, revenue per available room (RevPAR) is expected to increase by six to eight percent nationally in 1997. In most segments and geographic regions, occupancies are expected to either remain flat with 1996 levels or decline slightly, with the exception of upscale and luxury properties. Room rates are expected to grow across all segments. Debt and equity financing is available. And travel and tourism growth trends still point upward.

"All these factors point to a generally healthy lodging industry in the near-term," Nardozza said. "At the same time, industry analysts and observers are showing signs of anxiety regarding what the future holds for the industry."

Hotel Overbuilding?

According to Nardozza, hotel overbuilding within the next five years is a genuine industry threat.

Citing statistics from Smith Travel Research, KPMG reported that there were approximately 77,000 net available hotel rooms added to the U.S. lodging supply in 1996. On a gross basis, this equates to an estimated 85,000 to 90,000 new hotel rooms built in the U.S. in 1996. "This level of new construction is comparable to the peak levels experienced in the 1980s, and, according to current data, gross room additions are likely to exceed 100,000 in 1997," said Nardozza. For the most part, new room additions have been heavily concentrated in the economy and mid-priced segments, with the exception of large casino hotels. However, KPMG observes that a new building boom also is about to begin in the upscale and luxury categories. For example, plans for seven upscale hotels in New York City alone recently were announced. "Unconstrained building of new hotels will offset the extremely favorable balance between lodging demand and supply that exists today," Nardozza remarked.

Economic Downturn?

Since the turn of the century, the U.S. economy has experienced an economic slowdown every seven to ten years on average, according to KPMG. The last recession occurred in 1992, leading many economists to predict that the next economic downturn will occur within the next two to five years.

"With U.S. lodging industry slowdowns historically trailing overall economic slowdowns by 12 to 18 months, this obviously could be a serious threat to the industry over the next five years," Nardozza added.

Wall Street Retreat

The recent wave of hotel public stock offerings coupled with a large volume of activity in securitized hotel mortgages has made Wall Street the present king of funding for the lodging industry. Institutional investors have been buying up hotel shares and securitized hotel mortgages at a rapid rate.

Furthermore, Nardozza believes that the strong performance of lodging stocks in 1996, and the solid profitability predicted for 1997, will sustain Wall Street's current high level of interest in the lodging industry in the near-term. With many institutions more heavily invested in hotel stocks and REIT shares, however, questions have been surfacing in recent months regarding the ability of the lodging industry to sustain double-digit earnings growth in the future. "If a broad-based perception takes hold that the lodging industry may not be able to sustain the same levels of growth as achieved in the recent past, this could trigger a Wall Street retreat," said Nardozza.

Significant Industry Trends to Watch

With the lodging industry at a crossroad in terms of the present business cycle, hotel companies are placing renewed emphasis on strategic planning to meet shareholder expectations for profitable growth. With much of the business process re-engineering complete now, profitable revenue growth is the primary business objective, Nardozza reported. "What's new in the strategic planning process is the focus of hotel companies on increasing share prices as the ultimate objective of strategic planning, since so many hotel companies recently have gone public," he added.

What will this new focus mean for the industry going forward? According to Nardozza, many companies now are finding it more difficult to grow through normal in-house acquisition functions because fewer hotel properties are available at affordable prices. A corporate-level merger or portfolio acquisition may be a more feasible growth strategy. "Many companies are turning to corporate acquisitions for growth as a quicker and more cost-effective means. As a result, consolidation will be a topic of primary interest for the industry in the upcoming months. 'Bigger is better' has been, and likely will be, the driving fundamental triggering hotel company mergers and acquisitions," predicted Nardozza.

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, strategic planning, capital market alternatives, acquisitions and dispositions, and financial modeling.

KPMG Peat Marwick LLP is the U.S. member firm of KPMG Worldwide. KPMG International has more than 6,000 partners and 76,000 professionals serving clients through 1,100 offices in 837 cities in 134 countries. In the U.S., KPMG partners and professionals deliver a wide range of value-added consulting, assurance, tax and process management services to clients doing business in the following markets: financial services; manufacturing, retailing and distribution; health care and life sciences; information, communications and entertainment; and public services. Additional information about the firm is available on KPMG's World Wide Web site (http://www.kpmg.com).

CONTACT: Frank Nardozza, National Director, Hospitality Services, 305-789-2682, or Roger Johnson, National Director, Real Estate Services, 312-938-5001, or Frank B. Moon, Director of Communications, 312-938-5071, all of KPMG Peat Marwick LLP; or General Information, Melanie Papich, or Andy Stankiewicz, 312-266-7800, or Media Contact, Judith Sylk-Siegel, 212-661-8030, all of The Financial Relations Board/