The Hotel Industry Recovery: A Primer

During periods of economic recession, there is typically a shifting of market share from traditional channels to discount channels. In 2008, brand sites had 73 percent share of the market. According to TravelClick, it is 70 percent in 2009. Another sign that we are in the economic doldrums is when corporate bookings disappear and the consumer leads the market. Weekends are up in 23 of the top 25 markets according to Smith Travel Research (STR) – considering that each of those top 25 markets is down in revenues year over year, corporate bookings have got to be lagging badly.

RRC Associates states that leisure trips are not impacted like corporate bookings. While that is heartening, those of us who are full with leisure travelers know that they are not paying for rooms without negotiating aggressively for the very best deal they can get. To date this year, REVPAR (revenue per available room) is down 21 percent in those top 25 U.S. markets. In San Diego, it is down 25 percent according to STR. The RRC Associates study indicated 32 percent feel that the business travel recovery will be in 2011, ahead of 19 percent who say it will be in Q3 of 2010, 19% Q4 2010, 13% 2012, 17% beyond 2012 and there is a major shift or “trading down” of accommodations from luxury to upscale and upscale to mid-scale.

Big negative changes in average daily rate have fueled big drops in net operating income. This has already had a massive impact on the ability or lack thereof to refinance. One of the following scenarios will actualize in 2010:

A V-shaped recovery takes hold and all is good
A U-shaped recovery begins early in 2010 and shared pain is everywhere
A W-shaped or “double-dip” recession occurs and foreclosures set a new record
The current economic environment morphs into a full depression

I am a believer in Scenario 2, where 2010 shows a mild recovery in the second half of the year. Scenario 1 assumes that not only has the recession ended, but the recovery will be soon and strong.

On a longer term view of San Diego’s hotel industry, PKF Hotel Horizons is forecasting 6.1 percent demand growth from 2010-2013 vs. 1.2 percent that occurred from 2004-2008. Moreover, they forecast a 12.2 percent increase in REVPAR during that same 2010-2013 period vs. a 5.2 percent annual increase the past 5 years. It is clear that the current economic cycle is at or near the bottom in 2009 the question is, will we be “in hotelier heaven in 2011?” If we are, it will likely be with the help of inflation. After previous recessions, rate increases have taken several years. As an example, in San Diego, the average rate remained completely flat from 1989-1995 and again from 2002-2004.

Macroeconomic Advisors is reporting that this is the first time since 1988 that we are experiencing two straight years of negative gross domestic product growth. PwC is forecasting a flat 2010 nationally with the decimated group market. Assuming San Diego follows the national trends as well as the historical growth in rates post recession, we can expect flat ADRs for a few years. Looking at the Blue Chip Economic Indicator forecast, perhaps we can put some sanity on the direction we are headed:

2008 2009F 2010F

Real GDP +1.1% -2.6% +2.0%

CPI +4.0% -0.6% +1.8%

Corporate Profits -8.5% -12.4% +6.7%

Disposable Personal Income +1.1% +2.3% +1.6%

Unemployment Rate 5.8% 9.3% 9.9%

These numbers, as bad as they look, do not portend the aforementioned Scenarios 3 or 4. If this is the bottom, we can expect the balance of 2009 to continue with a weak Q3 and Q4 hotel performance. Based on the current data, a drop of 18 percent REVPAR in Q3 followed by a drop of 6 percent in REVPAR Q4 is not unrealistic. Coming off the 25 percent in the first half of 2009, this is welcome.  2010 might look about as flat as it gets; down a couple of points in the first half, up a couple of points in the second half.

We will be analyzing these numbers in more detail at a Breakfast Briefing scheduled for October 14, 2009 at one of our owned/managed hotels. In the meantime, feel free to write me at [email protected] with any thoughts.

Robert A. Rauch, CHA
President, R. A. Rauch & Associates, Inc.


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