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Changing Markets – What’s Going On
August 17, 2007

Let’s all agree that sub prime is not a below-grade cut of meat. However, let’s also agree that we are not seeing the financial markets or the free world as we know it come to a screeching end. This is blip, a moment in time. That’s about it!

The current wave of finger pointing recriminations and hysteria over the current volatility in the financial markets isn’t healthy for anyone. Of course being fed a steady diet of ever-so-wise talking heads on TV doesn’t help calm the nerves of all of us involved in lodging real estate and finance.

I stand back and think about what it all means for our business. I wanted to get back to the underlying basics in our industry:

First:

• Lodging supply growth is still at historically low levels;
• Lodging demand is high;
• Record number of room nights are being consumed;
• Demand growth is diminishing but remember its off very high bases;
• The dollar is weak bringing in overseas demand for lodging;
• Profits are high in lodging companies

In summary we are in a very healthy, long-lived industry.

Second:

• Many Wall Street lenders have gone into hibernation, if not panic;
• Hedge funds, especially those (with heavily leveraged trading strategies) who have helped fuel market liquidity, are having some cathartic shocks as they learn that there is a law of financial gravity, and that what goes up, can come down;
• Many traditional longer-term sources of liquidity can and will remain in place and will provide a countervailing influence;
• There are historic low levels of corporate deficits

Third:

• Current GDP across the globe is strong by historical standards;
• Corporate profitability globally is expanding the capacity of balance sheets to shoulder debt, leading to stronger coverage ratios for companies;
• Emerging markets are being transformed by their strong growth and actions dependent on U.S. market conditions;
• Global financial markets are for the first time truly not dependent on one market such as the U.S.

Fourth:

• Bonuses for the hedge funds investment bankers may be less this year;
• Ferrari sales may drop!

So what does this mean for us?

• Widened debt spreads on loans;
• Less loan-to-value proceeds;
• Harder to refinance or find debt;
• Less new construction in lodging;
• More opportunities for strategic buyers rather than private equity

In the long term, less supply means even higher values for existing hotels and resorts.

This current situation is emblematic of the swings and roundabouts of being in the real estate business. Lodging is real estate, so we know that we have to suffer the ups and downs of supply/demand cycles, financial cycles as well as the vicissitudes of being in the real estate market.

Let’s just remember there has been incredible amount liquidity of late leading to a feeling of low rates, cheap money being the norm. However, it has been unusual and we feel entitled to it. To do so would be naïve. Let’s hope that this lack of liquidity debt availability doesn’t trigger a pull back in capital expenditures in either and/or the overall domestic and international industrial markets and trigger general cutbacks to the extent that it causes a softening in GDP. To do so would be an indication of lack of management by our own Federal Reserve and be out of sync with the reality of a healthy global economy.

Let’s never forget, not for one moment, that we are in a strong and healthy global industry in a strong global environment and market.

Posted by Laurence Geller on August 17, 2007 | Comments (0)