Being in the hotel industry is like having a bad back. You know there are going to be plenty of aches and pains, but in the long run, you’re going to get where you need to go as long as you keep shuffling along.
That was the feeling at the 31st NYU International Hospitality Industry Investment Conference held at the Waldorf-Astoria in New York this week. Attendees gave the aura of plugging away and putting on a happy face while praying that tomorrow everything will be alright.
But here’s the catch—the industry has a long way to go before things turn around. Like an exotic dancer who has fallen on hard times, the hotel industry needs a dramatic makeover before travelers start slipping dollar bills into its garter belt.
And that will all start with the luxury segment, which as STR president Mark Lomanno pointed out during his presentation, hasn’t been hit harder than any other segment based on demand. But it is the high-profile representative of the hotel industry, and the AIG effect remains in full force—whether hotel executives like it or not. Once it begins showing a rebound, then the industry as a whole can breathe a sigh of relief.
Attendance at the conference was about 1,700—nearly 25 percent fewer than in 2008. And while the Waldorf’s nooks and crannies are well known for producing deals during this conference, it was a pretty uneventful affair in that regard. While deal makers put on a good face of keeping busy, there was a lot of thumb twiddling going on. Undoubtedly there will be deals down the road that had their genesis at the NYU conference, but for the most part, this year’s affair was a low-key get-together during which there was a lot of uncertainty.
In a related blog, Lomanno says there was an air of resignation at the conference. That’s certainly true, but it goes beyond that in that no one sees the light at the end of the tunnel. Yes, things will start improving as 2009 progresses, but this recession has been so deep that it’s going to take several years to completely dig out.
Tough road ahead
The consensus from sources at the conference is that this environment most definitely is worse than the 2001-2002 downturn. Revenue generation is dramatically lower now than during that time period, except for the three or four weeks immediately following 9/11.
That means there’s going to be a lot of trouble ahead for owners who can’t generate enough revenue to meet debt service. Words such as “gargantuan” and “avalanche” were used during the conference to describe the upcoming financial chaos caused by owners not able to pay mortgages.
Steve Van, chairman of Prism Hotels and an expert in commercial mortgage-backed security loans, predicts that the CMBS default rate will go to 8 percent by the end of 2009, and lenders will start taking back properties as borrowers stop making loan payments.
It’s clear these are the worst of times. But with that said, it is up to the industry leaders to present a positive face whenever possible. Confidence breeds confidence, and for the most part, industry executives are trying hard to keep smiling. STR believes hotels will manage to the level of confidence—in other words, if expectations are bleak, hotels will continue to reduce rates. If hoteliers become more confident, rates will reflect it.
Here are some other thoughts following the conference:
* One of the best awards dinners I’ve ever attended came Tuesday when Cornell University presented Bill Marriott with its Icon of the Industry Award. It was a quick affair lasting about three hours—a perfect amount of time for an awards presentation. Marriott set the tone by telling attendees at the beginning of his speech: “Like Elizabeth Taylor said to husband No. 7 … I’m not going to keep you very long.”
Marriott’s message was clear: Sure it’s tough out there right now, but like all recessions, this one will end, and those who plan to be successful better be ready.
* Steve Joyce, president and CEO of Choice Hotels International, said he expects the decline of GDP to stop in the third or fourth quarter of this year.
“We’re actually hopeful and starting to believe there will be some signs of the year improving,” he said.
* Chris Nassetta, president and CEO of Hilton Hotels Corporation, agreed.
“You see some great tell-tale signs. Some life in consumer confidence, capital around the world is starting to thaw out a little bit,” Nassetta said. “It will be a slow, arduous process because the financial system had a significant number of years in terms of excess.”
But for every ying there’s a yang, and Mit Shah, senior managing principal and CEO of Noble Investment Group said capital is not loosening at all.
* Nassetta said the second quarter of this year in terms of Hilton’s business is probably the worst.
“One of the biggest concerns I have going forward is U.S. policy,” Nassetta said. “There is a burning desire politically and from a consumer desire to never have to endure that again. The risk is that we’ll try to regulate and legislate stability. The risk is we’ll take a meaningful amount of long-term growth out of our economy.”
* Frits van Paasschen, president and CEO of Starwood Hotels & Resorts Worldwide, reminded me of the old United Airlines commercial when a boss went to a group meeting, gave everyone airline tickets and told them to go out and see their customers.
“The most important thing is to get out and see people,” van Paasschen said. “To get out and look people in the eye is still the most important way to communicate.”
The day will come when business travelers hit the road again, and hotels need to be ready for them—or risk disappointing them in a big way.
*Sean Mahoney, CFO for DiamondRock Hospitality, had one of the best pieces of advice for hoteliers when he said: “When you’re in a 15- to 20-percent RevPAR decline scenario, it’s impossible to cut your way out.”
* Some lenders have taken properties from owners who can’t make debt service, but most remain in a wait-and-see approach.
* The art of forecasting is almost a relic. Most executives said they are forecasting for a month or two, but they don’t trust anything longer than that because booking windows are so short.
* The spread between bid and ask for a property is so wide that some executives said they aren’t sure if current owners will ever come back to reality and understand the property they bought in 2005 or 2006 is worth as much as 40 percent less than what it’s worth today.
* More and more developers are turning to the U.S. Department of Agriculture’s Rural Development loan program to help them finance hotels in markets with less than 50,000 people. Will there be an onslaught of 70-room limited-service properties popping up in the next 18 months? One developer told me: “Any port in a storm.”
* One of the biggest worries for hotel owners is the upcoming negotiating season for corporate rates. How one owner described it to me isn’t printable in a family setting, so let’s just say he expects hotel owners to not fare well during the negotiations.
* Steve Rushmore of HVS presented research that indicates those who expect a huge buying opportunity to emerge this year is correct.
“If you are going to time the market for an acquisition, the time would be the end of this year or the beginning of next year,” Rushmore said. “The bottom of the cycle from a value perspective will be in 2010.”