By Rick Swig
How Investors Handle Issues Today
Will Impact Next Year’s Results
A LOOK BACK AT WHAT HAPPENED IN THE HOTEL
industry in 2008 can give one a case of whiplash. Conditions
are mixed in terms of both asset productivity and transaction activity. Investors are either in a deep depression or
mildly exhilarated, depending upon a property’s location.
For example, high fuel costs are having varying impacts
on different markets. Hotel owners in Orlando, Las Vegas,
the Caribbean and Hawaii have already experienced the
effect of higher fuel expenses through the shuttering of
low-cost airlines and fare increases by traditional commercial carriers. As the surviving airlines fulfill their promises of reduced capacity to “unprofitable” destinations,
hotels in these locales will be further harmed.
Conversely, gas prices have increased the instances of
“stay-cations” or visits close to home. National parks and
their surrounding destinations were packed this summer as
families jumped in the car instead of getting on an airplane.
Major destination cities that are surrounded by dense
population bases, like San Francisco and New York City,
also enjoyed solid regional demand and related revenues.
While currency devaluation made offshore destinations
unattractive for US citizens, favorable exchange rates
for international travelers provided a windfall for hotel
owners. European channels, such as bookings.com or
venere.com, moved buying habits away from traditional
travel packages and opened up even more destinations
to those wishing to visit non-traditional US locations.
The currency windfall may collapse, however, as the
United Kingdom and other European countries are beginning to feel the impact of their own withering economies.
Though this is no prediction for currency parity, vacationers,
primarily Europeans, who enjoyed the super-sale in the US
may not have the financial capacity to sustain their purchasing power in 2009. And if hoteliers are looking east for
the Chinese and Indian traveler invasion, do not expect it
next year. The infrastructures for providing mass travel services to the emerging markets are simply not in place yet.
Meanwhile, owners in primarily corporate destinations
are probably feeling crushed this year. Corporate travel
managers and meeting planners have mandated reductions to conserve profitability. This comes at a particularly
bad time for operators because travel managers will take
the mood and emotion of the moment to negotiate their
full-year 2009 room rates. It is critical for owners and
operators to remember that the annual contract signed
today will impact their profitability for at least the immedi-
ate future, if not well beyond. There are still hoteliers who
rue the days they made deals with radically discounted
room rates during the 2002 and 2003 downturns.
Transaction activity has been reduced to a virtual crawl.
There is no lack of equity capital to generate sales, but
the bid/ask gap and the lack of financing are clouding
the path. The bid/ask spread will only grow hazier due to
some of the differences between markets. Buyers will have
to figure out why and how they should purchase assets
due to broad cap rate spreads. Markets with the most
diversified demand feeders will command a premium.
Secondly, potential buyers may be forced to predict market rebounds based on comparable historical trends, as
well as fundamental market strengths and weaknesses.
As cap rates increase in conjunction with lower NOI
Confusion and lack of clarity define 2008,
and no further rescue or annual performance
enhancement is possible at this point.
performance, the valuation multiples may lead to pricing
that seems insanely below replacement cost. As brokers
or owners entice buyers with thoughts of underper-forming environments with great upside potential and
critically below-replacement cost valuations, buyers will
either be lured into a questionable deal or actually make
a reasonable and profitable purchase.
Confusion and lack of clarity define 2008, and no further rescue or annual performance enhancement is possible at this point. The focus must be on decisions made
today that will have a direct impact on 2009 results. It is
important to recognize cyclical behavior to understand
that tomorrow will not resemble current conditions. ◆
The views expressed in this article are those of the
author and not REAL ESTATE FORUM.
Rick Swig is president of RSBA & Associates, a hospitality
industry consulting firm based in San Francisco. He may be
contacted at firstname.lastname@example.org.
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