RSBA & Associates 
Hospitality Consulting Services
400 Spear Street, Suite 106
San Francisco, CA 94105
Email: [email protected]
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 The Bigger They Are,
The Harder They Fall
by Rick Swig, September  2002

With a few months to go in 2002 hotel real estate has probably fared better than the stock market, but that doesn’t make for a good report card.  This year has truly supported the adage of “the bigger they are, the harder they fall.” 

While many smaller geographic markets can claim that this year’s revenue has been slightly down from or even on par with 2001, the top 15 markets have slipped significantly from their revenue levels of last year through the first two quarters. Additionally, the luxury hotel segment has led the way in the decline, while suffering from both lower occupancies and average daily rates.

Ironically, it has been the traditionally most consistent market performers, which have led the downturn.  According to Smith Travel Research, cities with strong, irreproachable historical performance, such as San Francisco, New York, Boston, Miami, and Washington, D.C., reflect some of the greatest instability.  Coincidentally, markets, such as Houston and New Orleans, which were crippled in the last down cycle of the late 80’s and early 90’s, have exhibited the most buoyancy this year. 

The business sources, which provided success for the highest producing hotel markets, also created the conditions for descent.  Demand segment diversity is the key to any destination’s success, and like a hotel or restaurant, markets might actually be rated with stars, which represent strengths in specific demand segment categories – one, two, or three. 

One star would represent the Commercial transient segment with demand from the business traveler.  The second star would consider the Leisure transient traveler from both domestic and international sources.  The final star would describe the Conference attendee or Group traveler as part of a citywide event or in an individual hotel.  Those markets with the most demand stars should be consistently strong.

The aforementioned “irreproachable” markets certainly have fit into the “three star” category with demand throughout the year and seven days a week from a previously balanced combination of diversified demand sources.  In the past these weakness in demand from one source would be offset by unsatisfied demand from another.

In 2002 the worst case has happened – all three stars have dimmed at the same time.  The factors in the downturn are definitive and indisputable.  The destructive combination of a slipping economy, terrorism, plus a dose of oversupply have provided this cycle’s toxin.  “Fear” has become the customer postulate, whether relating to terrorism, corporate failure, or personal job loss. 

The American culture with its assumed “right to travel” has sustained the Leisure travel market, even as terrorism, consumer confidence, and air transportation headaches have made their impacts.  Patterns in leisure travel have changed, however, with more emphasis shorter trips to convenient destinations within driving distance.  Weekend days have become the occupancy leaders.  The international traveler segment has diminished, however, with a significant jolt to gateway centers.

First, there was the “ bomb”, then a domino effect of poor corporate performance.  Travel was the first expense to be curtailed, and in many markets the business traveler has disappeared.  Hotels have clamored to capture the attention of remaining customers with room rate incentives galore.  Although some poaching of market share has been successful through discounting, the primary lesson learned by hotel operators is that rate incentives to the corporately restricted Commercial segment may not stimulate incremental demand.

The Conference/Group sector has been impacted by a combination of the elements from the Leisure and Commercial segments.  This has been demonstrated through poor discretionary attendance, mandated attendance reductions, plus conference postponements, and cancellations. 

Our country’s current President’s father professed the allegory of a thousand points of light coming together to combine for success.  During the current regime it seems that the points of light have coincidentally diffused to temporarily take hotel guestroom demand away.  Now, the questions surround the antidote for the situation with speculation on the time that it will take for it to take effect.

In the meantime the business of hotel real estate transactions and new development has slowed to a crawl.  The conservative nature of lenders and their hesitation to fund new construction in recent years is making those practitioners look smart, as rampant expansion and over supply would have created even further turmoil.  As a result of being accurate in their position, lenders may likely continue their posture on new construction, which certainly will impose governors on prospective developers.

The disconnect between buyers and sellers has grown.  Buyers are claiming discounts due to declines in net operating income and risk factors associated with hotels.  Sellers are claiming that their hotels are worth the same as they were at the end of 2000, blaming a market of “temporary insanity” with great “future potential” due to limited new supply.

While 2002 has seen the assemblage of opportunity funds to sweep up distressed assets, the virulence of indigent owners has not emerged.  Lower interest rates in combination with lower risk loan to value ratios have prevented failures, while lenders have not been aggressive to guillotine responsible owners of hotel real estate because of short falls due to a cataclysmic environment.  The vulture may be circling, but the carrion may not be present!

Transaction opportunities will emerge.  Fatigue and boredom may become factors, as owners may become tired of waiting for a turnaround and look to review deployment of investment dollars.  As growth through development and acquisition continues to crawl, hotel portfolio owners may look towards merger with or acquisition of other portfolios to increase yields through greater critical mass.  Finally, the gap between seller expectation and buyer willingness may narrow, as mutual needs can be met through some level of compromise.  Whether the movement comes via blockbuster trades or small bites remains a question.

RSBA & Associates
400 Spear Street, Suite 106
San Francisco, CA 94105
E:mail:   [email protected]
Tel:  (415) 541-7722
Fax: (415) 541-5333
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