The prognosticators for the industry completely missed the worst decline in revenue per available room in history and the entire economic collapse. Even as late as 2008 at the Americas Lodging Investment Summit and the New York University International Hospitality Investment Conference, they were still predicting upward movement in RevPAR and hotel values.
The problem is the hotel forecasters look at the wrong indicators, and they are insulated from the things that really matter to correctly predict RevPAR and especially future values. They are doing it again as they are making projections disconnected from economic reality. They even are pointing to 1990-92 and 2001 as indicative of how to judge this recovery, and there is absolutely no such connection.
The increases in unemployment, home foreclosures, bank balance sheet strength, lending to small business, consumer balance sheets and the entire capital markets environment are different this time. All the metrics of the economic indicators that matter are totally different by a factor of 2 to 3 times. REIS, possibly the top real-estate research firm in the country, has looked at the correlation of gross domestic product to demand for all types of real estate, and has concluded there is not the correlation for the past 20 years that everyone in real estate has assumed—especially in the hotel industry. All you need to do is look at how the forecasters and appraisers for the hotel industry completely missed even the direction things were headed in 2008.
To many of us outside the hotel industry, the collapse was glaringly apparent in the spring of 2007, yet the hotel industry was forecasting big increases at industry conferences in the early and middle part of 2008. GDP in Q4 2009 was up 5.8 percent—a very misleading number. It was materially inflated by the end of inventory liquidation and US$100 billion of federal stimulus money, along with historic low interest rates, all of which combined to add probably 2 percent or 3 percent or more to GDP. If you were to try to claim a correlation to that number, it is clearly false.
There will continue to be anomalies in the GDP number in 2010 because of various actions by government that are not sustainable or normal. To say now that GDP and RevPAR are closely correlated, is to say GDP numbers, which are distorted by various major factors of historic proportions, is to also say that we have distorted projections of RevPAR.
Metrics that matter
Here are some metrics that really do matter. True unemployment is probably about 15 percent or 16 percent. It will take four to five years to return to more normal levels of 5.5 percent. Homes are under water by at least 20 percent on their mortgages constitute 9 percent of total homes. More than 15 million homes are under water. Foreclosures will increase later this year. People in this situation do not take trips or vacations. The euro and the pound will remain under severe pressure for several years. There will not be the flood of European tourists we saw between 2005 and 2008. Local and state taxes are rising and will continue to do so for several years. The deficit will continue to rise at very dangerous rates constraining private markets and causing taxes to rise at the local, state and federal level on the middle class as well as for the upper income people most likely to travel. Home equity loans are dead, meaning no excess dollars for vacations. Consumers are delevering and restraining spending.
The levels of leverage and underwriting will be much different for the next 10 years than they were between 2004 and 2007. The risks are much higher now, so capitalization rates will be higher. Discount rates need to be much higher when calculating future value. Don’t be fooled by the lower cap rates on a few select service deals recently—they are not indicative because there is little supply of product to buy, so too much money chasing a couple of deals. If you go by the value projections I have seen lately from some industry forecasters and appraisers, you are taking a big risk of disappointment.
The hotel industry needs to start and look at far more meaningful projection metrics than just saying GDP is correlated to 1992 and 2001. Those indicators proved to be entirely wrong in 2008 and they will again now. Things will be much better but you need to be careful and know what you are doing to be successful going forward. Do your own analysis of where RevPAR is going, and look at the world, not just one man’s projection of GDP.
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’s available through his website.
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