Gas Prices (likely) Won’t Hurt Hotel Demand

LOS ANGELES—Data gurus presenting during the 21st annual Meet the Money conference at the Sheraton Gateway Los Angeles told the approximately 300 attendees that historical trends and forecasts indicate rising oil prices most likely won’t affect the hotel industry’s busy travel season.

Mark Woodworth, president of PKF Hospitality Research, said unless there’s an extreme spike to more than US$150 a barrel for oil, the hotel industry shouldn’t see any negative effects from rising costs at the gas pumps. PKF modeled three hypothetical situations for rising gas costs: one with a base price of US$95 per barrel, one with a price of US$125 per barrel and one with a price of US$150 per barrel.

“It’s not until we get to the (US)$150 dollar a barrel scenario until (revenue per available room) dips,” Woodworth said.

He used Moody’s Analytics’ proclamation that every US$1 increase in the price of crude oil raises gasoline prices by 2.2 cents per gallon and costs consumers about US$3 billion over the course of a year. He then cited PKF research from 2005 and this year as reason to believe consumers will continue to fill their gas tanks.

During the last gas-price crisis (2002-2005), a huge number of consumer dollars went to gas stations, but sales at grocery stores decreased dramatically. “Consumers were essentially trading food for oil,” he said. This time around, consumers are choosing gas and groceries while giving up new cars. That provides some optimism for Woodworth.

“One thing we know about cars is they wear out and have to be replaced,” he said, adding that eventually more jobs could be created because of the future demand for automobiles.

So, there’s one thing to watch for when considering how gas prices will affect future hotel demand. “If somehow oil gets up to US$150 (per barrel) by the end of this year, it looks not very pretty for 2012,” Woodworth said.

Meanwhile, Jan Freitag, VP at STR, said: “We don’t see any one-to-one-relationship (that people are traveling less because of gas prices). … We’ll figure it out as summer progresses.” STR is the parent company of HotelNewsNow.com.

The other common denominator during the statistical presentation at the conference was the volatility of the cycles the industry is experiencing.

“With every recession, while the room demand percent change fluctuates wildly, the (average daily rate) percent change fluctuates even more wildly,” Freitag said.

“The volatility is increasing,” said David Loeb, managing director, real estate and hotel senior analyst for Robert W. Baird & Company. “We are getting to the point where cycles are deeper.”

Added Woodworth: “The gap between the haves and the have nots is bigger today than it’s ever been.”

Following is a snapshot of the three presentations.

David Loeb
The analyst warned that too much glee at hotel-industry conferences is not a good thing.

“When too many of you are happy, then lenders start lending for development, then the cycles end,” he said.

Loeb said during 2010 there were 165 institutional quality hotels traded. Total spent: US$7.6 billion. Already this year there have been US$5 billion in deals.

“Debt is available in top markets for high quality assets,” he said.

Loeb reeled off other characteristics of the deals market, including:

Loeb also talked about the performance of the stock market and pointed to the Baird/STR Hotel Stock Index as a key indicator for how hotel stocks are performing. He said there have been several equity raises (worth US$7.3 billion) during the past three years.

“In ’09, raises were for survival and balance sheet restructuring; in 2010 they were for acquisition funding,” he said, adding that as a result stock prices are up, but shareholders have been significantly diluted.

He expects more initial public offerings to occur, starting with RLJ Hotels, which is expected to announce its pricing soon. In addition, he said he expects two Blackstone Group entities—La Quinta Inns & Suites and Hilton Worldwide—to eventually go public. He expects La Quinta to be first because it has more debt coming due in 2012 and Hilton to go public in 2012, possibly as two separate companies (ownership and management).

He pointed to the recent successful IPO of Summit Hotel Properties, on which Baird was the lead advisor, as a reason more hotel companies might go the public route. He noted the Summit IPO included 65 select-service hotels and raised US$253.5 million. It included a 35% leverage ratio. The company’s market capitalization following the IPO was US$364.4 million. Summit’s market cap as of the close of business on 3 May was US$411.16 million.

Mark Woodworth
About half the audience raised their hands when Woodworth asked who was happy. He said there are plenty of reasons to be happy, including the firm’s long-term best-case scenario forecasts:

He did, however, have some words of caution.

“Until home prices begin to increase … there’s going to be a lot of uncertainty about the underlying fabric of the economy,” he said.

PKF expects the strongest hotel markets in 2011 to include many that have large exporting operations: Seattle, Oakland, San Diego, Portland and Minneapolis.

He said the slowest markets during the year will be New York, Raleigh-Durham, Philadelphia, Indianapolis and Washington, D.C. Washington is on the list because the federal per diem there was reduced 9.8% for 2011, and Indianapolis is on the list because it will be hard for the city to absorb a 1,000-room JW Marriott hotel that opened earlier this year.

Jan Freitag
The STR executive said the U.S. hotel industry sold more transient room nights during the first quarter of 2011 than it did the first quarter of each of the last five years. Room rates during the first quarter were better than during the first quarters of the previous two years, but not better than the first quarters of 2007 and 2008.

View Freitag’s Meet the Money presentation (log-in/free registration required).

“Group room demand is basically on par with where it was in 2008 or so,” he said. “It’s going to be very interesting to see how that demand plays out.”

He then pointed to a slide in his presentation titled “Negotiated Rates Will Take All Year To ‘Burn Off’ Rate.” “This is a pretty scary chart,” Freitag said. “It’s going to take this year to burn off that group ADR that was committed six months, nine months, 12 months ago.”

Freitag said the luxury segment is improving at the same rate during the last up cycle, which is a sign recovery is under way.

In addition, he provided the Hendersonville, Tennessee-based company’s summer and year-end forecasts.

Summer (June, July and August) forecast: