Hotel leaders see trying times ahead
05 JUNE 2008 11:00 PM
Bill Marriott, Jonathan Gray and Barry Sternlicht look into their crystal ball and predict tougher times for the U.S. lodging industry.
New York—The toughest part of the current economic slide is yet to come for the hotel industry, according to three high-profile executives who spoke during a general session at the 30th Anniversary NYU International Hospitality Industry Investment Conference.
During the opening general session panel moderated by Lalia Rach of NYU’s hospitality, tourism and sports management school, Bill Marriott, Jonathan Gray and Barry Sternlicht agreed that tougher times could likely be ahead for hotels in the U.S.
“I can’t go much than beyond next week,” said Marriott, chairman and CEO of Marriott International, when asked to predict the next 12 months. “International will be strong.
[In the U.S.] weekend business is soft and midweek transient business is beginning to soften.”
Sternlicht, chairman and CEO of Starwood Capital Group, said things look bleak in the eyes of consumers.
“The U.S. consumer is stretched. I think he is going to hit the wall,” he said. “Business will tighten their belts.”
Sternlicht said occupancy in the U.S. has been dropping for two years, yet brands have been able to aggressively raise average daily rates—however the second half of 2008 might be the end of the road for that.
“It’s going to be 18 months,” he said. “It’s going to get worse before it gets better.
There are huge problems in the banking market. Throw it on top of the consumer, and it’s hard to find the green spots.”
Gray, senior managing director and co-head of the real estate group for The Blackstone Group, said he is being cautious going into the latter half of 2008.
“It doesn’t feel that we’re going to ‘V’ out of this,” Gray said, referring to some past cycles in which markets accelerated as quickly as they declined to form a V on a performance chart.
“Everybody is surprised that the hotel business in the U.S. has held up so well,” he said. “We’re going to have to ride through this for a while.”
Marriott said the jury is out on how corporations will handle 2009 hotel bookings when negotiations begin in a few months. He said he expects them to be deliberate about requesting competitive rates—in some cases they might be lower than they were in 2008.
Marriott said there is a good measuring stick for hoteliers to watch.
“If the [gross domestic product] comes back up to 2% we will have some good growth in RevPAR,” Marriott said. “If it does not, we will not.”
One area that doesn’t seem to be dramatically affected by the economy is development. There are many hot spots around the world, according to the executives.
“The one place you know things can get built is the Middle East. They have equity and they have debt,” Sternlicht said. “The Middle East is amazing. It’s tax-free. There’s no income tax, no corporate income tax, no real-estate tax. It’s becoming a haven to park money.”
“The scale for these opportunities is so large,” said Gray, whose company’s holdings include Hilton Hotels Corp, La Quinta Inns & Suites and a large collection of luxury hotels. “The Middle East is in the middle of an epic building boom.”
Sternlicht also cited South America as a region to watch for development, and said Mexico is becoming a force.
Marriott said his company has 26 hotels in the Middle East, with 39 in the pipeline.
“India is very strong,” Marriott said. “Our pipeline in India is actually larger than our pipeline in China. Russia is a very strong economy, particularly in Moscow.”
There are other growing markets that unexpectedly pop up on the radar, according to Marriot. For example, Marriott International signed 11 deals in Thailand last year.
Sternlicht said brands will continue to emerge, including ones that aren’t American oriented.
“In places like India you don’t need American brands,” he said. “You may see some indigenous brands develop in India and China.”
Gray disagreed, saying brand recognition in these areas is much higher than you would expect.
“In these countries there’s an aspiration affinity for these brands,” he said. “Even the local travelers will stay because of the consistency.”
Sternlicht, however, pointed out that in many areas of the world, the rules for development can change quickly, which makes it difficult to plan and extremely important to have a strong local partner to help guide the way.
“It’s easier to invest in India than China,” he said. “In China, they keep changing the tax regime.”