However, FelCor’s Corcoran says it is too early in this downturn to tell if that will hold true. In his view, as the economy first
began to falter, the lower-end segments took the brunt because
of high fuel prices. “Initially, gas prices stopped a lot of the people who were driving to those properties because the percentage
of their total income going for gas got so much higher,” he says.
“I don’t think at this point we’ve begun to see the trade-down
phenomenon.”
So if mid-market hotels stand to gain in this economic malaise, who else can prosper? Well-established brands with frequent guest reward programs will probably outperform independents, as will those franchise companies with flags in many
different segments. In the most precarious position are those
who own. “The owners who have real estate, financing and operating risk are in the greatest jeopardy, whereas franchisers who
collect money off the top-line revenue and have no bottom line
have the least amount of risk,” Corcoran states.
Nevertheless, Gordon points out that all players in the business
are likely to see a drop in revenues. “You would expect that the
operators who own no real estate will probably ride out the downturn better if they have very little leverage, but they will obviously
make a lot less money,” he says. “The challenge is mostly for the
owners, and you’ll see it in the stock prices for all the real estate
investment trusts. It’s really a question of how people continue to
finance their ongoing operations and refinance their existing
debt. There have been times of capital shortages, but I don’t ever
recall an absolute credit freeze like this.”
“Those organizations
that were out there
engaging their
customers in a difficult
period of time created
loyalty that could not
be changed.”
MICHAEL W. MURRAY
HERSHA HOSPITALITY
Against that backdrop, what can hotel owners do if they
need to refinance their assets? Gordon suggests that lenders
will be more open to working with borrowers, rather than simply taking over a property. “The banks themselves are exposed
and illiquid, so there isn’t as much of a desire as there might
have been in the past to take control of a project,” he says.
“You will find lenders very accommodating, trying to work out
a way that deals can be reconstructed. There is nothing the
“There tends to be
a movement down
toward limited-service
properties as people
cut back.”
PHIL GORDON
PERKINS COIE
lender can do by taking control of an asset that the owner isn’t
already doing.”
Again, Corcoran says it is too early in the downturn to know
what lenders will do, although it is likely they will assist their top-grade clients deal with any problems. “You would hope that most
banks would work with a good borrower when there is not a
source to replace existing financing that may come due. But
that’s not a guarantee,” he says.
Another question hovering over the marketplace is whether
franchise companies will relax their brand standards or delay
implementing new programs in light of the difficulty owners
may have in getting the dollars to finance those initiatives.
Some chains have already pushed through major refurbishments. For example, Homewood’s Wyatt reports that her brand
has nearly completed a five-year, system-wide refurbishment
program. Holiday Inn also has undergone the same, says Corcoran, whose company owns a number of Holiday Inn-flagged
properties. Doing so today, however, might be a harder sell. “If
you were working on a new idea for a brand right now, you
might want to put it on hold until you felt a little bit better
about where things are going,” Corcoran says.
Similar to lenders working with borrowers, brand companies
may be willing to assist owners with whom they have good relationships to facilitate product improvements at a pace acceptable
to both parties. “The major operators and owners can cooperate
in being thoughtful about how expenses are cut,” Gordon states.
“Capital projects will be delayed to the extent they can be. If the
2001 experience is anything to go by, you may find the franchisers relaxing the brand standards, some of them operational,
some of them physical.”
In light of the capital crunch, brand managers will likely oblige
long-time owners on a case-by-case basis. “While franchisers have
a certain standard they want to maintain and it may be difficult
for an individual owner to get the financing necessary to do that
today, they may extend the time period in which that needs to be
done. Again, it’s likely to be an owner-by-owner dialogue,”
Murray says.
