The recovery is real, as we reported in our last update in Hospitality Innsights. Double-dip recession fears are just that – “fears.” It has become clear to forecasters that the bearish predictions for 2010 were a bit over the top. On a macro basis, gross domestic product grew 3 percent in the first quarter of 2010, down from the nearly six percent growth in Q4 of 2009. This growth seems to be more sustainable, and unemployment levels seem to inching back, albeit at a slower pace than all of us would like to see.
Tourism spending rose at an annual rate of 3.9 percent during the first quarter, led by increased spending on hotels and other accommodations, according to The Bureau of Economic Analysis. The increase is significant when compared with a 1.5 percent drop during the fourth quarter of 2009. Spending on hotels and other accommodations rose at an annual rate of 11 percent in the first quarter, after falling at a rate of 7.9 percent in the fourth quarter. The BEA said accommodations were the largest contributor to the growth in travel and tourism spending.
In San Diego, the Leading Economic Indicators are up for the 14th consecutive month according to the Burnham-Moores Center for Real Estate at USD. The overall U.S. economy has a significant impact on demand for hotel rooms. The increased demand from the slowly growing economy is led by a combination of leisure travelers, corporate profits that are beginning to return and a desire to end a recession.
It’s been said that for Americans, a vacation is a birthright, and the results of the new Portrait Of American Travelers clearly confirm this. This new, nationally representative survey of U.S. households with an annual income over $50,000 reveals that American travelers took an average of four trips for leisure purposes during the past 12 months (comparable to the average number taken in previous years). But, they were far more resourceful in their pursuit of affordable fares and rates on those trips, according to YPartnership, the survey’s authors.
The bigger question is whether or not average rate growth will return so that profits in the lodging sector will improve. In San Diego, the second quarter of 2010 is moving toward positive growth in revenue per available room (REVPAR) based on increases in demand (rooms consumed) of nearly 7 percent and decreases in average rate of about 6 percent. As we are now in summer, it appears that the trend is toward marginally positive average rate growth. Nationally, Steve Swope, CEO of Rubicon says, “the average daily rate (ADR) shortfall is narrowing even further than we reported last month.” Ergo, REVPAR trends will be up this summer according to my review of the summer Smith Travel Research (STR) reports on San Diego.
Assuming the above scenario, what will be the impact on net income and hotel values? PKF Consulting reported that 9 of 10 hotels saw a drop in profits in 2009. Naturally, this was based on reduced occupancy and ADRs. In San Diego, HVS International reported a $48,000 per room drop in hotel values in San Diego. This is only bad news if one needs to sell or refinance. The good news is that values will begin to increase once REVPAR goes positive enough to compensate for increases in operational costs.
Individual time horizons will be driven by knowledge of the market and operating skills as well as the current loan status of individual assets. Value creation is made by buying at the right time. Moreover, operating fundamentals are critical. In other words, manage your hotel first and foremost.An explosion of transactions are fast approaching due to the maturity of loans, and values are not quite predictable in the industry due to volatility of financial performance, risks of inflation, terrorism, and the rate of growth of economic fundamentals.
So what are the trends? According to the Lodging Industry Investment Council, these are the top trends:
-Unlevered returns decreasing
-Lots of equity chasing deals
-Occupancy and ADR are going up
-Interest rates are going up (personally I disagree with this for the balance of 2010)
-Loans to value will be stable
-Cash is king
-Investors are still cautious
-Hotels will be bought both from traditional sellers and bank REO
-Quality and quantity of hotels are not good at the moment
The advice that comes from all of this is simple. Do not sell if you are able to hang on for a few years when occupancy and ADR levels return to 2007 levels. This may take several years but it will happen sometime between 2013 and 2015. We are certainly happy to assist lenders, owners, asset managers and managers with any analysis they need to make on their San Diego hotels.
Rauch is a hotel owner/operator. His firm, R. A. Rauch & Associates, Inc. manages and asset manages hotels in the western U.S. Rauch is founder of www.hotelguru.com and teaches a class on hospitality entrepreneurship at the college level. He has served on several boards of directors nationally, regionally and locally in San Diego.