RSBA & Associates 
Hospitality Consulting Services
400 Spear Street, Suite 106
San Francisco, CA 94105
Email: [email protected]
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 Hotel Operators Will Face Many Challenges
As Economy Continues on Downswing
by Rick Swig, June 2008

Clearly there is a Distinct Shift Occurring

in the US economy. For the hotel industry, several issues, real and psychological, have emerged that could impact operations and real estate. The combination of failing housing values, weaker consumer finances and the $4-a-gallon gas prices will certainly have a real impact on travel.

Additionally, there may be a knee-jerk reaction of corporate restrictions on travel and meetings, even though there may be no definitive business trend to justify those limits.  In the first quarter, revenue performance was not significantly impressive one way or another. New supply did outweigh added demand, but the ratios nearly offset each other, while room rate growth was generally in a favorable range of 4% to 5%. This is clearly not the end of the boom cycle, but the lodging sector is not immune.

Possible job cuts, plant closures and other traditional recessionary corporate tactics certainly present a challenge for travelers who now are re-evaluating their plans for getaway weekends or summer vacations. The traveling public, as they have in previous economic downturns, will become more conservative in their discretionary travel spending.  Yet broad-brush commentary may be misleading without a segregated review of all segments. Evaluations must be based on comparisons between various industries and tourism segments, such as domestic and international, as well as geographic territories, either regional or defined by urban and suburban. Not all hotel locations are influenced equally.

The most dynamic impact has been felt in hotel sales, although there have been few significant transactions since August 2007. The combination of revised loan pricing, restrictive lending rules and a general lack of credit has brought the market to a screeching halt. While hotel performance has not waned significantly, pricing or valuations of assets have slipped dramatically. This has left owners more confused than ever about how their operations can be yielding more than last year, yet the asset’s market value is significantly less. Owners will either become longer-term holders or take deep discounts on their property sales.  As the economy stagnates, hotel operators must avoid reactive panic tactics, such as exaggerated room rate discounting.  This will only further undermine the valuation and cash flow integrity of their properties. The combination of inexperienced revenue managers, automated revenuemanagement tools and the pressure tomeet RevPAR budgets could lead operators to reduce room rates, a phenomenon that was prevalent in the early part of this decade.While some will point to their “success” of gaining market share through roomrate incentives, no one can argue the fact that those tactics gutted the overall revenue potential of most hotel markets, particularly during the period of stabilization that occurred after the downturn in 2001.

If revenue declines do occur, owners will find themselves at odds with brands in respect to service and product standards.  The brands were banking on continued growth in the hotel segment to improve general product standards and competitive positioning. The requirement for significant physical product and labor-intensive service enhancements now will be fought by owners with reduced financial means to accomplish those initiatives. It is important to remember that the ample financing that drove significant transaction activity during the past five years also underwrote a substantial portion of physical improvements that were well outside of traditional replacement reserve guidelines of 3% to 5% of annual gross revenues.

Certainly, these issues only scratch the surface. Other considerations include an industry alliance to address federal government barriers for incoming international travelers, the availability of qualified human resources for hotel industry workforces and operational expense trends out of alignment with revenue growth. In time, each of these will have to be addressed to enable successful hotel operations and investment stabilization. 

The views expressed in this article are those of the author and not Real Estate Media or its publications.

Rick Swig is president of RSBA & Associates, a hospitality industry consulting firm based in San Francisco. He may be
contacted at [email protected].

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

Rick Swig Article Index:
With New Supply at a Near Standstill, Now Is the Time to Buy Hotel Assets / Rick Swig / December 2007
This Year’s Critical Issues Will Escalate If the Hotel Industry Doesn’t Address Them Now / Rick Swig / September 2007
CapEx Discussions Require Balancing Brand, Owner Needs; The current fervor of standard compliance may simply be a reasonable process to catch up on postponed necessities / Rick Swig / June 2007
Lack of Human Capital Is Becoming Serious Issue for Hotel Owners, Operators / Rick Swig / December 2006
Successful Hotel Brand Differentiation Means Connecting With Customers / Rick Swig / RSBA Associates / June 2006
Shortage of Sites, Rising Expenses Should Keep Hotel Development in Check / Rick Swig / RSBA Associates / February 2006
In Today’s Hotel Acquisition Market, How Much Do Cap Rates Matter? / Rick Swig / RSBA Associates / January 2006
Lodging Business in Transitional Year, But Challenges Will Remain After ’05; A Hotel with Truly Unique Attributes Is Worth a Premium / Rick Swig / October 2005
Despite Lack of Long-Term Data, Hotel Developers Favor Hybrid Projects; The Fractional and Condominium Component Not a Proven Solution to Development Prosperity / Rick Swig / June 2005
Travelers Prefer Innovation, Creativity Over Predictability, Discount Pricing / Rick Swig / March 2005
Recent Occupancy, ADR Growth Still Do Not Spell Post-9/11 Relief; Total 2% revenue growth over four years has not kept up with national annual average inflation growth of 2.5% / Rick Swig / RSBA Associates / November 2004
Hotel Success Hinges on Relationship Between Owner, Asset Manager, GM / Rick Swig / August 2004
Hotel Operators Can Gain Market Share Through Distinctive Brand Images; A 100-room boutique hotel can develop more identity within a market than its 1,000-room competitor  through customer impact points / Rick Swig / May 2004
Hotel Operators Must Share Blame with the Economy for Stagnant Performance / Rick Swig / RSBA Associates / January 2004
Investors Seeking Opportunistic Hotel Buys Are Likely to Come Up Empty Handed  / November 2003
Hotel Sector Remains in the Game Despite Reaching Strike Three; Occupancies are now beginning to improve compared with last year and a poor first half of 2003 / September 2003
Some Stability Has Returned to the Hotel Sector, But Its Staying Power Is in Question; The Plundering of Lower Market Tiers Has Cost Upscale Hotels / May 2003
New Business Practices Essential to Lodging Companies’ Success / February 2003
Unreliable Market Trends Yield an Uncertain Direction / October 2002
The Bigger They Are, The Harder They Fall / September 2002
News of Boutiques’ Demise Is Greatly Exaggerated  / May 2002
Management by Spreadsheet Erodes Full-Service Hotel Core Values / Feb 2002
Hotel Lenders Face Challenges In Tough Climate / October 2001
Where We Are Now Depends on Starting Point / Summer 2001
Solid Management Practices Can Improve Franchise Value / May 2001
Hotel Market Stagnation To Continue / January 2001
Here Today…but Tomorrow? / November 2000
Ready, Willing, and Unable? / August 2000
Independent Hotels: The New Brand Alternative / June 2000
Ankle Biter Syndrome / January 2000
Redefining a Mature Hotel Sector / November 1999
Focus On Operations Is Not Enough / August 1999
What’s Next?? / May 1999
Growth Through Management  / Feb 1999
Expect a Subdued Market in 1999 / Feb 1999
Hotel Real Estate: Back to Fundamentals / Nov 1998
The Hotel Investment Barometer For Institutional Investors / 1998
The State of Independents / 1998
Success (or Survival) of Boutique Hotels and Resorts / 1998

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