The U.S. presidential election is finally over, but absolutely nothing got resolved. The parties are in exactly the same place as before—deadlocked.
There is little reason to think President Obama will suddenly be a compromiser, which has rarely happened, although he might realize if he does not compromise, his legacy and the next four years is shot no matter how much he blames the Republicans.
The right wing still holds to its no-taxes pledge, although U.S. Speaker of the House, John Boehner, did sound quite conciliatory regarding the fiscal cliff to try to work a bridge, also known as “kick the can.”
The bad feelings persist, or seem to be even worse. We all hope the adults will take back the sandbox and make a deal, but whatever they do is unlikely to really solve anything in the short run. It will just postpone the outcome and will bring more uncertainty for another six months. The preponderance of opinion now is that going over the cliff is a real possibility, although I still believe a deal of some type will get cut before 31 December. Too much is at stake.
Ramping up regulations
If you liked the regulations on pool lifts, wait until you see what the Environmental Protection Agency and other federal agencies have in store for you. The administration has been sitting on a lot of regulations until after the election. For example, coal is about to be pretty much forced out of power generation. If you get power from a coal-fired plant, your power cost is rising.
There will be more pool lift-type rules. Unions again will be rewarded; if you are in a union area, you will find it harder to fend them off.
Superstorm Sandy has not only destroyed or damaged New York-area hotels, but the costs are likely $50 billion or more. Nobody yet knows how much will be charged to insurers, but you can be certain your insurance costs are going up.
As just happened in California, local or state taxes of one kind or another will rise as the government employee pension plans again fail to meet yield targets and have to be funded by taxes. Unfunded pensions are the elephant in the room for several more years. Taxes will continue to rise in all forms and you will be paying more.
Some analysts claim they don’t understand why average daily rate is not rising faster because hotel industry fundamentals are strong. ADR is not rising because GDP—if you deduct the extra defense spending Obama shoved into spending just before the election—is only rising at 1.5%. Real unemployment is 14.7%. The uncertainties over the fiscal cliff, Obamacare, Dodd Frank, and Europe and the Mid East are keeping companies from hiring or investing. There is very real concern by business over the election results. Regulations will now ramp up for everyone, especially lenders, and the costs will be passed on.
Most large corporations have layoff plans about to go into effect as the economy is not improving enough. Many large public companies had revenue decreases last quarter. Uncertainty over the fiscal cliff is here. Many new regulations are coming to everyone next year. Obamacare is here to stay, and restaurant chains already are moving staff to part time or no time to get off the mandate. Other companies will do the same.
Dodd Frank is slowly going into effect along with the global bank regulatory framework known as Basel III. That means more costs to banks so more cost to the borrowers and less ability to get loans.
CEO sentiment is negative. Money poured out of the stock market over the past few days, and into U.S. Treasuries right after the election—always a bad indicator of business sentiment. Europe is far from resolved and is not getting better. Social unrest is bound to increase. It is unclear what is going to happen next in China as they have regime change this week. Taxes are going up on people the hotel industry claims are keeping things going: college graduates with good jobs … and also on your business and everyone else who makes decent money. Tax reform might happen, but who knows if or when. This is all happening now.
Then we have the clock almost running out on attacking Iran. The United Nations just reported Iran is hiding key facts from inspectors. Israel has an election shortly, and when Prime Minister Benjamin Netanyahu gets reelected, he will have his mandate to attack. Now Obama might go along because he has no more elections. Even if he does not, an attack by Israel will have the U.S. in day one. That has to get resolved in the next several months. That is the big one. “BengahaziGate” will now come to the fore in the House, and it is really ugly. It will likely become a major scandal for the administration. Terrorism is back. And Syria is still a mess and spreading to Lebanon and farther.
Why worry? I’ll tell you
All of this is early 2013—not some future set of concerns, and surely not some imaginary potential black swans. I know some of my friends in the industry think this is all Chicken Little and all will be fine. That is childish and naïve. They say, “Revenue per available room is up 6.5%, so why worry?”
I’ll tell you why: ADR is not rising as fast as the industry needs it to in order to offset the rising costs that are coming. It cannot when all of the above is in play. Businesses started to travel again in 2011 and 2012 because they had no choice. They had to reconnect with their customers. But the hotel industry made it easy to find less costly rooms than was the case in 2007, and with the Internet and competition for occupancy, it is now easy for travel departments and individuals to shop for perfectly good, but less costly select-service or extended-stay hotels. The old days, pre-2008, of stay-in-the-best-full-service-property-and-order-wine-and-other-expensive-things is over for awhile.
Many corporate, Wall Street and individual travelers have learned that a good select-service property is just fine for their needs. They stay in a nice select-service hotel and keep their budget under control. Select-service and boutique brands have cannibalized full service.
My 3% RevPAR forecast for 2012 was too negative, but the same issues are now front and center—and worse, in many instances. My timing was off. Occupancy has reached where it is likely to get for quite awhile. Nobody is in a mood to spend if they can find a deal. No company is letting its staff spend any more than needed. Events are on shorter booking and tighter spending caps.
It is too uncertain a world for 2013, and people who can’t understand why ADR is not going up as they think it should need to go back to Economics 101 and learn about supply, demand and pricing equilibrium. If you raise prices too much in times like this, demand goes away or customers trade down. That is why ADR is not going a lot higher for awhile.
Stay safe and limit risk. It is still not time to step too far out on the limb. Anything can happen in the coming year, and it is best to stay liquid and careful. Capital markets can get spooked very easily over the next few months and shut the drawer if certain bad events happen. Don’t get mislead by rosy forecasts and claims of strong demand continuing just because it was good this year. Up 6.5% from the depths is not where the industry needs to be, and it is not where we were. It is all relative. Look at the nominal dollars and not the percentage. Going up is always harder the higher you go. Don’t get caught again. It hurt really badly last time.
Joel Ross is principal of Citadel Realty Advisors, successor to Ross Properties, the investment banking and real-estate financing firm he launched in 1981. A pioneer in commercial mortgage-backed securities, Ross, along with Lexington Mortgage and in conjunction with Nomura, effectively reopened Wall Street to the hotel industry. A member of Urban Land Institute, Ross conceived and co-authored with PricewaterhouseCoopers The Hotel Mortgage Performance Report. Ross is also the author of Ross Rant, a commentary on the economy, financial markets and politics that is available through his website, www.citadelrealty.com.
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