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Taking The Pulse At The Lodging Conference
October 4, 2007

I just returned from the annual Lodging Conference in Phoenix, a favorite among the hotel investment circuit junkies due to its affable hosts, Morris Lasky and Harry Javer, the laid-back, resort environment of the Arizona Biltmore, the casual dress code and an over-abundance of conference food. This little conference that started out some 13 or 14 years ago with a few hundred attendees had the Biltmore overflowing in late September with some 1,400 attendees.

The timing of this event is always interesting because it is the first event after the summer break and during a time of the year when the U.S. economy and stock market tends to be volatile. This year did not disappoint either as the discussion centered on the U.S. credit crunch, the housing slump and the surfacing of the dreaded “r” word—recession.

No doubt, the deal pace has slowed dramatically as 80%-plus financing no longer seems to exist and some say capitalization rates will go up 50 basis points (some believe 100 bps) in the next six to eight months. Many say mortgages are capped at 70% loan-to-value, down from 85%. At the same time, some see this as merely a bump in the road, while others worry if the American economy is about to go into recession as a result of the housing slump. Some say the U.S. is already in a recession.

I would call the general mood of the industry “cautiously optimistic” versus the unrestrained optimism of six months ago. Thankfully, operating performance remains very solid and developers and financiers have been much more prudent during this prolonged up-cycle.

At the same time, PricewaterhouseCoopers revised its forecast on September 28, reflecting a small change in U.S. hotel growth, including supply, occupancy, ADR and RevPAR, compared to its August 2007 forecast. PwC says 2007 RevPAR will increase 5.6%, 0.1% less than forecast in August, primarily due to a 5.7% increase in ADR. Occupancy is forecast to remain stable at 63%.

A lot of announced deals are falling apart or being delayed due to higher interest rates, reduced availability of financing, and lenders re-evaluating risk and pricing. As a result, a lot of anticipated new supply should see attrition with construction costs still being an issue. Decelerating growth does not spur new growth and, indeed, it appears consolidation and M&A activity is catching its breath and taking a pause to see what happens to the debt market. The Federal Reserve’s liquidity infusion is helping lenders and players are starting to realize the cost of borrowing is higher and terms tighter. So expect deals to get done but volume to remain much lighter in the near term.

When it comes to green issues, the discussion you hear is that developers and franchisees want to know if “green” will turn into ROI. If not, they are still somewhat reluctant to invest. Most operators are focusing on energy management to create savings but even still say ROI takes awhile, too. Other developers say they need incentives to make “green” a neutral proposition from cost development perspective.

Other comments overheard at the conference: U.S. operators are seeing dramatic decrease in in-bound travel from abroad due to visa issues—even with weak dollar; amenity creep will stop when RevPAR stops growing.

While there was so much to talk about at The Lodging Conference due to the volatile credit market, there was a noticeable lack of news. This conference has served as a launching pad for several new brands, major deal announcements and much more. This year, however, the actual news made at the show was negligible, which based on the feverish pace we have seen the past five or six years, might not be such a bad signal. As long as the credit crunch and residential housing slump don’t have a major, long-term impact on the hotel business, this adjustment in terms might be just what the doctor ordered to make sure hotels that should not be built are, indeed, not built, allowing this industry to continue to perform at or near peak levels.

Posted by Jeff Weinstein on October 4, 2007 | Comments (0)