RSBA & Associates 
Hospitality Consulting Services
400 Spear Street, Suite 106
San Francisco, CA 94105
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 Hotel Real Estate Owners Face a Brave New World
by Rick Swig, ISHC, June 2009

With 2009 nearly half over, the hotel sector is clearly in a brave new world. The trends for the first few months of the year showed average national declines of 10.5% in occupancy and 6.5% in average daily rate. This decimated gross operating profits and related EBITDA by at least 30%, even with significant and successful efforts by hotel operators to cut expenses.

Few owners today actually know the value of their individual assets. Those that do are part of a minority who were actually able to sell. Cap rate erosion coupled with general EBITDA declines would equal more than a 50% reduction in a hotel’s worth. Does this mean that hotel real estate values have been halved? Some owners might object to that assessment. By comparison in 2002, there was a 23% decrease in per available room value based on a 30% EBITDA decline with fairly stable cap rates.

A key issue affecting RevPAR is the practice of room rate discounting, which endless studies have concluded does not build occupancy. Discounting stems from panic by myopic operators desperate to capture market share at the risk of accelerating profit and property value declines, undermining brand value and having a long-term impact on pricing power. In the 2001 recession, as a result of rampant discounting, room rates did not return to 2000 levels for five years. Based on the current RevPAR trends, which are exacerbated by ill-fated discount mania, the 2010 national RevPAR forecast of $54.85 is almost on par with 2000 RevPAR of $53.79, according to Smith Travel Research.

Just think of the opportunities that may await investors with available capital to buy some lower-cost assets later this year or in 2010.

The real issue today is EBITDA, or what is actually left from revenues to pay debt. Recognize that during low occupancy periods, decelerated profits accompany RevPAR declines.

In the previous recession there was a 22% RevPAR drop with a 32% GOP collapse between 2000 and 2002 across all segments. A general decline of 28.5% in RevPAR and 47% in GOP between 2008 and 2009 is likely, with even steeper drops in the luxury segments.

Since hotel revenues plummeted after October 2008 in most markets, many owners are barely able to make payroll, much less debt service. This issue, in conjunction with little to no available financing, would lead one to believe that the lodging sector is about to enter the next phase of suffering: default due to non-performance.

This is the fifth recession the hotel industry has seen since 1973. The current downturn, although seemingly more grave, is similar to the 1980 recession because of the limited supply increases in recent years and relatively little development on the horizon. Additionally, given the government’s injection of capital into the financial system, there is great risk of inflation coupled with high interest rates, which neared 20% in the early ’80s.

Historically, there has been less than a 1.5% annual increase in inventory growth in the first four years after the start of a recessionary period, which indicates that no significant new supply would appear before 2014. Furthermore, after what might amount to a 10% decline in ADR in 2009, with some additional dropoff in 2010, room rates will begin to accelerate in 2011. Rates will likely exceed 2007 levels in 2013, with occupancy reaching 2007 parity one to two years after. So don’t panic yet. Just think of the opportunities that may await investors with available capital to buy some lower-cost assets later this year or in 2010.

There will be many factors to determine the timing for hotel transactions. These would include the narrowing of the bid/ask gap between sellers and buyers with differing opinions of current value declines of between 20% and 50% from 2007 levels; the process by which lending institutions either force or create a sale of distressed assets; the availability and the cost of credit; and the risk tolerance of buyers during the recovery. It would seem that hotel owners with loans coming due and with no ability to refinance might create some quick dispositions and bargain values, although there is a strong belief that lenders may gain little or no value in foreclosure. However, look out for some lender epiphanies resulting in some temporary foreclosure reprieves. 

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:
Hotel Operators Will Face Many Challenges As Economy Continues on Downswing / Rick Swig / June 2008
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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