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Sequester impact still felt in US hotels
September 4 2013

Several positive economic factors washed out much of the impact from the sequester, but hoteliers in select markets still feel the fallout from the fiscal cliff.

Highlights
  • Government travel, conferences and events have been cut as a result of sequestration.
  • The suffering is largely concentrated in Washington, D.C., around military bases and other markets reliant on government demand.
  • Ongoing budget talks on Capitol Hill could spell more trouble for hoteliers in the year ahead.

REPORT FROM THE U.S.—The fall from the fiscal cliff has been less tumultuous than anticipated, but many within the U.S. hotel industry still suffer from the effects of sequestration.

Pains range from cutbacks in conference spending to mandated reductions in travel to a widespread drain on the economy.

“It’s having an indirect effect as it flows more broadly to incomes and (gross domestic product). We’ve seen that in pretty tempered results and economic growth during the end of last year and into this year as well,” said Adam Sacks, founder and president of Tourism Economics.

“Part of the relatively modest increases in demand that we’ve seen so far in 2013 could partly be a function of that. There are also reports of cutbacks on the government travel side,” he said.

Transient trips are being culled, with thousands of secretaries, officials and scientists deskbound under a government-mandated, 30% across-the-board cut to budgets.

Group business is even worse, “way down” from prior levels of frequency and spending, according to Lisa Costello, VP of political affairs for the American Hotel & Lodging Association.

Several events have been cancelled outright, or saw significant dips in attendance from the government portion of their delegation rosters.

“We've heard (the sequester has) affected the number of people showing up for certain group meetings, especially association meetings, because government people are not showing up for them and some funding available for association meetings has gone away,” said Vasant Prabhu, CFO and executive VP of Starwood Hotels & Resorts Worldwide, during the company’s most recent quarterly earnings call.

Pinpointing the severity of that effect, however, is difficult.

“You can never tell how something would have been in the absence of those events,” said Lea Tyler, manager of U.S. operations for Oxford Economics. “You can’t deal with a double-blind experiment. It would be fair to say that we didn’t see quite the disaster that some people were talking about, but there undoubtedly has to have been an impact.”

The DC downturn
Certain markets, such as those surrounding military bases, for example, have experienced a worse impact than others, sources said. But nowhere is the sequester effect felt greater than in Washington, D.C.

The market has seen occupancy fall 1.8% year to date through July, with a subsequent decrease in revenue per available room of 0.6%. Average daily rates have mustered a 1.2% gain, according to data from STR, parent company of Hotel News Now.

Hotel executives corroborated the numbers.

During a recent industry roundtable at RockBridge’s Rock the Road event, John Belden, president and CEO of Davidson Hotels & Resorts, said “sequestration and budget nonsense has taken a toll on D.C. for a long time now.” Twenty percent of the group’s 45-hotel portfolio is exposed to the D.C. market.

Executives at Host Hotels & Resorts share similar findings during the real estate investment trust’s quarterly earnings call.

“It is not a secret to anyone listening in on this call that our Washington, D.C., hotels continue to struggle in the second quarter due to weakness in government and government-related travel stemming from the sequester …” said CFO Gregory J. Larson.

“Given the continued weakness in government travel, we expect our hotels in D.C. to underperform the portfolio in the third quarter,” he added.

It’s not just government employees who have stopped filling the capital’s hotel beds, sources said. Also on the chopping block are private companies, lobbyists and attorneys whose government contracts are not being renewed.

“The government weakness is the overwhelming cause for weakness in the greater D.C. market,” Arne Sorenson, president and CEO of Marriott International, said during the company’s earnings call. “You see a little bit of a difference between urban D.C. and suburban D.C., because I think when you get to urban D.C., more of that business is independent from the government. So it would be your prototypical lawyers and lobbyists and tourists coming to see D.C. and folks doing business with D.C. companies, of which there are a number.”

There are exceptions to the rule, however. LaSalle Hotel Properties reported strong quarterly earnings for its D.C. portfolio.

“During our earnings call in April, we reported that we have not experienced any sequestration impact in Washington. To date, we still have had no impact,” said Michael Barnello, president and CEO.

“Our portfolio in Washington, D.C. experienced RevPAR growth of 4.5% during the second quarter, running at a healthy 91% occupancy,” he added. “While the mix in D.C. has changed slightly over the past few years, the demand continues to be solid and steady.”

Surviving the sequester long term
The only thing more challenging than measuring the impact of the sequester on hotel performance to date is attempting to pinpoint its future impact, sources said.

“It’s such an unknown,” the AH&LA’s Costello said. “It’s kind of hard to make an educated guess as to what’s going to happen.”

Further complicating matters are ongoing budget debates on Capitol Hill, she said. “It’s really uncertain what the extent of the future cuts and how future cuts are going to impact the industry as a whole.”

Oxford Economics’ Tyler said the worst is likely behind the hotel industry.

“The way that they structured the sequester is that it was a big step in spending and then holding steady,” she explained. “In terms of the impact, it’s mostly an upfront kind of impact in 2013. That gets a little into 2014 because of the way the fiscal years work and so forth.

“We will see the impact of the sequester be smaller,” she added. “There will still be an impact this fall and into early next, but it will be smaller than what we saw in 2013 and perhaps nothing at all in 2015 and beyond.”

Offsetting matters is momentum in a variety of other industries and macroeconomic indicators, Sacks said, citing the Fed’s quantitative easing policies, a recovery in the housing market and the “energy market renaissance,” among others.

But hoteliers should be wary of some downside risk, he added.

“I mentioned the positive things that have been at work over the past roughly three quarters and how those have outweighed and washed out the effects of the sequester,” Sacks said. “As you look forward over the next six months, you can see things turn in the other direction. You’ve got the tail end of the effects of the sequester, but you also have the potential effects of the Fed quantitative easing on the downside … and questions about how that could affect underlying growth.

“The sequester is basically a story of having punched our way through,” he concluded. “As we approach the back end of this year, we face a round of new risks that we have to watch closely.”

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