The cyclical nature of the hotel industry means another deep downturn will come sooner or later. Hoteliers offer tips to better prepare for the next one.
REPORT FROM THE U.S.—“Cyclical.” If you’ve been in the hospitality industry for more than five minutes, you’ve likely heard the word. If you’re a veteran hotelier, you’re probably tired of saying it.
The cyclical nature of the hotel industry is a common theme that can be used to describe myriad situations and occurrences along the industry’s timeline. Following a sharp decline in demand, the cyclical nature of the industry can be used as a scapegoat to prevent panic. After prolonged periods of low demand, the cyclical nature of the industry can be used to assure hotel investors there is a light at the end of the tunnel.
During periods of high demand, such as the current timeframe during which more hotel roomnights have been sold year-to-date 2012 than during any other year in history, the cyclical nature of the industry is used as a word of caution. After all, if cycles are predictable and seem to get worse each occurrence, one could assume the industry is headed for another deep downturn sooner or later.
However, sources said predicting a downturn isn’t quite that easy. There are myriad factors that can lead to a downturn, some of which hoteliers can control (over-leveraging assets, oversupply) and others that are beyond control (9/11, financial crises).
“The key word is control. There are things we can control and things we can’t,” said Nick Lakha, president of Paramount Hospitality Management. “We simply can’t control oil prices or the housing market—those are items that affect not just our industry but every industry.”
Jan Freitag, senior VP of global development for STR (parent company of HotelNewsNow.com), said anyone who can predict when the next downturn will occur should play the lottery. He said demand declines are completely out of the hotel industry’s control and are more a consequence of general economic instability.
“The first thing that goes when a company is tightening the belt is travel,” Freitag said. “If (General Motors) says, ‘No more travel’ there’s nothing Marriott (International) can do about that.”
“Overall, it has been highly challenging to predict the last two cycles,” said Dustin Resnick, senior director of development and acquisitions for owner-operator HHM.
However, there are factors that led to the previous downturns that can be controlled in advance of the next one. Supply is the most obvious.
David Loeb, senior analyst at Robert W. Baird & Company, said while every cycle is different, supply and demand is a leading indicator in forecasting a downturn, particularly when it comes to the price of hotel stock. During each of the past downturns, hotel stocks “turned over” either the same month or shortly after net demand turned negative, he said.
Revenue per available room could still be growing, he said, but when dips in occupancy coincide with continued supply growth, trouble is on the horizon.
“When occupancy turns down, it’s only a matter of time before someone starts cutting rate,” Loeb said.
Banks helping out
Freitag said hoteliers have a poor memory when it comes to past downturns. Rather than realizing the effects of overbuilding, he said hoteliers are quick to deflect blame elsewhere. Developers, often accurately, look at new construction as market specific rather than looking at the bigger picture.
“For every developer we talk to, they say, ‘Well, my project makes sense but all the others don’t,’” Freitag said. “Everyone sees the data, yet we’re always going to see rapid increases in new supply.”
The saving grace, he said, is that the banking industry this time around appears to be more stringent with lending terms and could put the kibosh on rapid increases in supply.
“We can’t directly control supply, but as a result of this last downturn there is some erosion happening by way of the debt markets, which are much more critical of the deals,” Paramount’s Lakha said. “For example, lenders only have an appetite for top brands in high-barrier-to-entry markets and the debt ratios make sense.”
“The marketplace is sort of putting the brakes on developers,” added Robert Mandelbaum, director of research information services for PKF Hospitality Research. “We’re still bullish with our forecasts because … there’s not a lot of new supply coming online.”
On top of tight capital markets, there are some things developers and operators can do to limit their exposure to downturns and withstand them when they come.
“We’re putting more resources and infrastructure into enhanced revenue management so we have the right mix of business,” Lakha said. “And a lot of operators are being more diligent about keeping an eye on costs.
“For investors, you can invest in markets that are less cyclical,” Lakha continued, “like Washington, D.C., and other markets with less-dramatic declines, such as state capitals and university towns.”
Fred Schwartz, president of the Asian American Hotel Owners Association, said hoteliers need to have the right recipe for success, which is based on a financial model that can withstand the downturns. Whether it’s geopolitical issues or other headwinds, there is no dodging outside negative influences, he said.
“Measure twice and cut once. Be prepared,” he suggested. “The strong and diligent will survive and take advantage of the turnaround times. People that were more sustained in their growth may have deeper pockets now to take advantage of the uptick.”