I must have been at a different Americas Lodging Investment Summit conference than what I read about on another of the online industry newsletters. While everyone seemed to be out of the depression mentality, they were hardly “jubilant.”
It seems reality has finally begun to take hold for most people in the business, which is that, while the worst is behind us, it is going to be a slow, long slog to once again achieve the revenue per available room and value levels of 2007 and early 2008.
It likely will be 2014 or 2015 before we see real robust economic growth in the United States and the world. There is simply too much damage to the banking system in Europe and housing markets worldwide to assume there is going to be some wonderful recovery trend in the near term. It just is not possible given the dramatic constraints now put in place by the regulators and the markets on lending of all types. President Obama losing the election will help a lot, but there is so much baked into the legislation already that Republican frontrunner Mitt Romney cannot just change things overnight.
Forecasts get more reasonable
Despite having some people call me Dr. Doom and claim I did not know what I was talking about, I do note that STR (the parent company of HotelNewsNow.com) has come close to my 2% to 3% RevPAR forecast with their 3.9% revision released last week, which is down 44% from the previous 7% projection. PKF is also down from 6.8% to 5.4%. It should be noted that I think Mark Woodworth is highly competent, and we really don’t see the future much differently. We just have a somewhat different level of optimism about RevPAR. I only make this point to illustrate the rosy early forecasts from the Lodging Conference were not taking into account the capital markets’ message that things were going to go much more cautiously than the hotel industry thought.
In January 2008, the capital markets already had collapsed, so it was easy for me to predict RevPAR would be negative 1% in 2008 and 2009 would be much worse. There is a direct correlation between the capital markets and the hotel business to the extent that the capital markets/debt markets have a pretty good way of foreseeing where things are headed in the economy. So when the commercial mortgage-backed securities and general real-estate debt markets had begun to collapse in late July 2007, it was clear to several of us who were senior people in that market that the end was near.
It is the same way to forecast now. The debt markets are very uncertain. While there is some CMBS issuance now, the ability to sell pools is still uncertain, the future pricing is still uncertain and the ability of CMBS originators to firmly commit is also uncertain.
That also goes for on-book lenders. It is not that they do not want to lend; it is simply that the European and the U.S. fiscal mess make debt issuance foggier than in past times. This translates into the general uncertainty in the business world, which then translates into business not hiring and not investing in growth. That in turn translates into a slower growth of RevPAR than we should otherwise be experiencing at this point in the recovery.
Lenders willing to lend—but at a price
It is very nice to hear lenders say during ALIS they had money to lend. That is a long way from “here is a loan and the price is set at 6% at a 11% debt yield in some secondary city for a brand that is not Marriott or Hilton.”
Clearly the lenders want to lend you money. That is their job. That is how they earn profits and bonuses. The problem is their cost of capital is very uncertain, so it is hard for them to commit a rate and leverage level to you today when they are not sure what their cost will be while they hold the loan waiting to put it into a pool for securitization. There are so many black swans circling, the lenders cannot be sure right now that they will even be able to sell the loans.
This situation will not get better for months to come, and maybe not all year. There is simply no way for anyone to predict what might occur on so many fronts that even if two things go well, there are five others that may not. Syria is blowing up. Iraq is rapidly returning to the bad old days of 2007 thanks to President Obama pulling out all the U.S. troops way too early. There are no good solutions for housing—of that I can assure you because I am talking regularly with one of the primary White House advisors on this topic trying to find better solutions, and I am the original author of the refinancing program announced today by President Obama. Housing is likely to continue declining for the rest of this year. It is not clear if the bottom is late 2012 or 2013.
As the election rhetoric ramps up, people will get more scared, not less, as the attacks from both sides get nastier. Congress will do nothing at all this year to solve any problems. Iran is going to get bombed or have a massive uprising this year. Israel cannot wait much longer for President Obama to stop telling the Iranians, ‘Let’s talk.’
In short, nobody has any idea what this year might bring. In light of that, it seems best to plan for the worst and hope for the best. The good news is that buyers who execute during the next two years will make a lot of money by 2016 and 2017.
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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