05 June 2011
Flying en route from LA to New York for the NYU Hospitality Industry Investment Conference yesterday, I exchanged some emails with Michael Murray of the Mortgage Bankers Association. (I am a big fan of wi-fi on aircraft — no more downtime on those long flights!) He wanted my take on what’s ahead for the hotel industry and asked me the kind of questions that bankers ask — the ones that help you gauge risk and reward.
I told Mike that my view, whether cruising at 35,000 feet or with feet planted firmly on the ground, is clear: sunny skies ahead, with occasional clouds (and light showers), but no storms on the horizon as far as we can see.
Hotel industry fundamentals are improving, there is little new supply and there is virtually unlimited equity on the sidelines. Hotel values increased 10% to 15% in 2010 and prices are trending upward.
Here is how I see it now. I will let you know if anything I hear at NYU in the next couple days changes my view …
We know where the problems exist — rates are lagging, certain markets are not recovering as fast as others, and the pigs are still moving through the CMBS python. (And of course, someone will always remind us that we are just one flu pandemic, terrorist attack or double dip recession away from a setback.)
But the bottom of the trough was mid 2010, and hotel industry fundamentals continue to improve steadily. Lodging demand has now exceeded the all time record for room nights sold prior to the bust (more than a billion room nights), but we have more hotel rooms open now, so occupancy rate is still way below the peak times.
And more good news is that this steady improvement should continue for the indefinite future, into 2013 or 2014.
One nagging problem is rate, particularly on the group business that is already locked in for the next 12-24 months. But rate seems to be edging up also.
The luxury segment is leading the hotel industry out of the downturn and will continue to do so. Of course luxury was hit the worst when the recession struck (25% RevPAR declines), but it is coming back the fastest and the strongest. Next best in improvement are upper upscale and upscale properties. The economy properties seem to get stuck in the doldrums.
Both coastal markets were the first to go into recession and were hurt the worst. They are now the fastest in the recovery. New York continues to stand alone as the strongest market in the U.S., followed by San Francisco. Rates have been strong in these markets but property values have skyrocketed, with several reaching pre-crash peak levels on a cost per room basis. Right now, the recovery in the top 5 markets is a vastly different story than in the next 20 markets, and middle America is not seeing the kind of recovery the top markets are.
The kinds of properties delinquent in the CMBS pipeline cannot be classified by segment or geography. CMBS defaults are still best cataloged by vintage. And the 2005, 2006, and 2007 are the troublemakers. While painful for individual owners, investors and lenders, there is a process for resolving those defaults and it is not a mystery.
The hotel industry’s performance will certainly be affected by the economy. While the economy collapsing into recession would be bad for the lodging industry, the much-vaunted double-dip in the housing market just announced is a non-event . . . a patch of clouds that will not affect the lodging industry recovery. Why? The run up in housing prices was fueled by government tax credits, and the current “dip” is not a collapse, but rather just a continuation of the payment for past excesses that have not yet worked through the system.
But the industry is more resilient than many have thought. If the economy continues to muddle along (even with the drag of the housing market), and unemployment doesn’t spike up, the hotel industry will be OK. It will continue to improve. In fact, PKF Hospitality Research recently found that the cost of gas will not have a significant impact on the lodging recovery until oil hits $150 a gallon. At that point, PKF says they have to moderate their assumptions for continued improvement in the industry.
That is the way I see it now. I will let you know if I see anything in New York at the NYU Hotel Investment Conference that changes my mind. So stay tuned.
This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We’ve done more than $87 billion of hotel transactions and have developed innovative solutions to unlock value from troubled hotel transactions. Who’s your hotel lawyer?
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