If you listen to the hotel industry pundits, you would think the world is wonderful and getting better. They predict 2013 will be even better. I might have been a bit early a few months ago predicting results in the hotel industry are disconnected from reality, but now it should be apparent to all who have their head up and are looking forward that my revenue-per-available-room prediction of 3% was just a little ahead of itself.
In January 2008, when I predicted the hotel industry would have a negative RevPAR in 2008 and much worse in 2009, many people thought I was nuts. Well here we are again. Many people thought, and still do think, my prediction early this year that RevPAR growth would slow in 2012 was way off base, but let’s look at the real world and not what the dreamy hotel pundits are saying.
Recent headlines include:
- Iran plans to disrupt oil trade;
- Syrians flee Damascus and Aleppo;
- Leon Panetta says Syria is spinning out of control;
- Susan Rice, the U.S. ambassador to the United Nations, said if Syria collapses then the entire region could be pulled into war;
- Israel stated it intends to strike back at Iran for Bulgaria;
- the U.S. and Israel stated publicly they are preparing a military incursion into Syria to grab the chemical weapons;
- Israel has put its military on alert to protect against an incursion from Syria or Lebanon;
- twenty nations announced a naval exercise in the gulf in September in preparation for Iranian attacks on tankers; and
- the leadership of the Syrian military was assassinated.
If things continue to come apart for Iran, the chance of another attempted terror attack in the U.S. rises, and an attack on Saudi Arabian and other oil facilities rises exponentially. The Pentagon has said very publicly they anticipate such an act. Iran becomes isolated when Assad falls, and they are irrational and feeling trapped—that is very dangerous for a religious-driven dictatorship.
Then we move to Europe. Spain might need a total bailout. The Europeans still can’t agree exactly how to save the Spanish banks. The Bundesbank has expressed strong disagreement with the Draghi bond-buying program. The euro continues to decline. Patty Murray, a Democrat leader and senior U.S. Senator from Washington, stated unless the Republicans do what she demands on raising taxes, she will drive the country over the fiscal cliff to get her way. (That might be one of the most irresponsible statements ever made by a Senator).
A Wall Street Journal headline said it all: “Weak Economy Heads Lower.” Gross domestic product is barely 1.5% and headed slower. Wells Fargo projects an even worse third quarter. Retail sales declined more than anyone expected. Factory orders are now declining. Business spending is declining. Jobless claims are rising again. Congress is doing nothing. President Obama is busy campaigning and not governing. Federal Reserve Chairman Ben Bernanke stated the economy is doing worse than he predicted just a short time ago. Even the White House has reduced its economic growth projection, which already is far above all other economic projections. True unemployment and underemployment went up to 14.9% in June. It is going higher. There is talk of maybe another recession from some rational economists. There is new talk of Greece not being able to stay in the euro.
The gap in group business
All of that is right out of the newspapers of just the past week. None of it is my making stuff up, nor an opinion of mine. It is the real world beyond the hotel-pundit dream world.
Many of my friends running hotels say: “But the group business remains good!”
Here is that reality from a top event planner who runs more than 700 events this year alone for her company. Late in 2011 and early in 2012, when everyone thought the world was getting better, a lot of companies booked a lot of group business for the year. They signed contracts, spent money and had big plans. Now they have looked at all these contracts and concluded they already paid the deposits and other upfront costs, and there are cancellation fees, so they might as well go ahead with what is booked.
However, planning is now just getting underway for 2013. Every single event undertaken in 2012 is being looked at in detail by the finance departments to assess its validity, who was invited and why, potential cost reductions, what events can be cut out. The finance managers, not the marketing people, are in control now.
2013 is going to be a very different year for group business, and it is not going to be up by the time next year is underway. If the international news events described above play out as the headlines predict, then cancellations will happen in a major way. Travel will decline. The pressure to reduce rates will ramp up.
While all of this happens, food costs are going to ramp up very badly because of the drought. Insurance and energy costs will go much higher than they are currently. The cash-flow squeeze will become clear.
If I’ve said it once …
Like many of my friends in the hotel industry, you can say this is all Chicken Little; things in the hotel industry are very good and getting better. That is exactly what everyone told me in January 2008 when I said things were going to get terrible.
I continue to advise: Conserve cash, cut costs now, do not expect to raise average daily rate next year, plan for much higher operating and food costs. If you are working on a financing, get it done sooner rather than later. If things in the Middle East or Europe blow up, the debt and equity markets will freeze up just as they did in 2009.
Get ahead of the wave that is coming. If you plan and act now, you will be fine. In 2008-2009 nobody was ready for what happened. You are a fool if you are caught this time. Don’t buy into the dreamy predictions of more RevPAR and value increases into next year. Don’t get fooled by the current level of group bookings. Be prepared for the tough times.
If I am wrong and all these world problems go away, you will be ahead of the game. You will not have missed an opportunity. The opportunity cost is a fraction of the potential risk cost if I am correct. There will be plenty more deals next year and in 2014. You need to make a risk adjustment to your return parameters before you do your next deal to make sure it can be worthwhile if the black swans do prevail.
The good news is the U.S. is the best place to be in the next few years. There is now a very strong banking system and loads of liquidity in the system. A lot of people outside the hotel industry are preparing for bad times and conserving cash. U.S. corporations never had so much free cash on their balance sheets and such low-cost debt. Few companies or even individuals are over extended this time. U.S. consumers are still cutting their debt. The housing market has stabilized. Capital is rushing to the U.S. from Europe, the Middle East and China. This is the safe haven.
If you prepare now and stay liquid and careful, you will be fine. Acquisition opportunities in 2013 and 2014 will be very good. By the Lodging Conference in October things will be much clearer as to what Syria and the whole of the Middle East looks like. It will be interesting to see what the dreamers are saying then. Continue to watch my one metric: the 10-year Treasury yield. When it gets very low, things are about to get very bad. It is now at a historic low.
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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