With corporate profits down, economic issues facing many global markets and looming financial issues, the time is now to build cash reserves.
The brands and others with an agenda are eager to say that we’re still in a “golden age” for travel and hotels, but the reality is different.
2015 was the peak for hotel values, as well as general commercial real estate values. Cash flows are good for many properties, but on an inflation-adjusted basis, they are only slightly ahead of 2007. Occupancies are flat or may even be headed down in many markets. Average daily rates may be good in some markets, but they are not Golden Age ADRs and they, too, will flatten.
Corporate profits are continuing to decline quarter after quarter. Companies are in cost-cutting mode now to offset the decline in earnings. Travel is the first thing to get cut along with staff. Wall Street, formerly a huge spender on travel, is being decimated by Dodd-Frank and other regulations, and by slow trading markets. A lot of trading is now done by computer, which further reduces travel expenditures.
Even if Brexit does not pass, there are serious problems in Europe, which will be exacerbated by the Brexit vote. Many members of the Conservative Party in the U.K. want even more concessions by the European Union, and Spain will have a new government that will be under pressure for getting concessions. The European banks are in weak condition and the economy is not really growing materially. No matter what the European Central Bank tries, it is not really working. The euro will remain weak, making travel to the U.S. costly.
In other regions, China is getting into more and more problems with overwhelming debt at the private company level. Nobody has any liquidity and the banks are not lending to them. The big state-owned companies are not paying payables in any sort of timely manner, further squeezing the medium and small suppliers who are then defaulting on their payables and bank loans. China is a real mess now, and to protect the yuan, the government is beginning to crack down on capital outflows. Latin America is a disaster as well, as Brazil and Venezuela are in complete meltdown. Forget travelers from Russia and the Middle East.
The U.S. stock market is staying pretty flat, and there is no chance bonds are going to yield much for several more years. That leaves the baby boomers with much tighter budgets than they expected, so travel then becomes more of a luxury for many. Wages continue to be sluggish, and consumers are reluctant since the crash to incur a lot of new debt on their credit cards.
We have maybe the two worst presidential candidates ever in my lifetime, and that leaves companies and consumers nervous. Nobody has any idea what 2017 will look like. Apart from two bizarre and thoroughly dishonest candidates, and what they might do, many good economists are now predicting a 30% chance of a recession in 2017. That number has begun to increase lately as the year is not showing itself to be good. If the June jobs report is again weak, then it will signal things are on the downswing and chances of a recession will rise materially. Productivity is terrible so wages are not going to rise much.
The CMBS market has recouped a little, but it still has almost $200 billion of maturing loans to find a home for, and that will mean a growing number of defaulted loans and eventually foreclosures. Hotels will follow shopping centers as the problem category. As things look like they might get worse, the regulators will crack down even more than they did already on real estate loans. Transaction volumes will remain weak and so price discovery will be difficult. That has already been the case since the start of the year. It may be a little better now, but it is far from an active liquid market. The result is that cap rates are rising and are now more like 9% than 7.5%.
If you ignore the talking heads from the brands who just want you to buy another franchise, and you ignore the others with similar agendas, you will see that hotel stock prices are in decline. People who want to make excuses will continue to blame Wall Street or New York for not seeing wonderful things in the hotel industry, but there is a reason the big portfolio buyers of a few years ago are sellers now, and it is not simply that the fund they manage has reached maturity.
All the hoopla at ALIS is now clearly just that—hoopla that is not proving accurate. It did not take long for all the pundits to lower their forecasts materially. The mood at the NYU International Hospitality Industry Investment Conference was still overconfident.
It is long past the time when you should have already cut costs, built up sales and marketing, and saved cash. Build your cash reserves. You will need it next year. If you have enough credit and cash, you will be able to possibly pick off a good deal where another owner is in default on his maturing mortgage and needs equity to keep his hotel. If you have cash next year, you will be in a position to take advantage of the weak guys.
I still believe 2016 will see flat, or maybe even negative occupancy, and flat or barely increased ADR. 2017 will not be a pretty year. If you did not sell in 2015 as you should have, then be aggressive in cutting costs and maximizing profits as best you can and plan for things to get a lot slower later this year. Every part of the world is experiencing a slowdown and reductions in forecasts of growth.
The U.S. might be better for now but we are not an island. All we need is what happened in a nightclub in Orlando to happen at a major hotel during a conference and you can kiss the rest of the year goodbye. With President Obama trying to make believe Orlando was not a radical Islamic act of terror, and was all about gun control, and hobbling the FBI and cops from being aggressive against the threat, you need to be sure your own security is beefed up and ready for anything. As we saw in Orlando, even with a cop at the door, a determined terrorist ready to die for the cause can kill a lot of people quickly. Be prepared.
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 Wharton School graduate, Ross began his career on Wall Street as an investment banker in 1965. 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. Ross also was a founder of Market Street Investors, a brownfield land development company. A member of Urban Land Institute, Ross conceived and co-authored with PricewaterhouseCoopers The Hotel Mortgage Performance Report. Ross served two tours in Vietnam with the U.S. Navy.
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