One of my black swans has now landed with a major “splat” right on the hotel business. It is one of the major risks I have been writing about for more than a year, and one of the major reasons why I have not been a believer in the revenue-per-available-room projections of more than 3% this year.
The price of oil is just starting to go up, and the administration is not going to be able to do anything to stop it. It is too late. Drilling on federal land is down by two-thirds, and offshore leases are way down. The keystone pipeline is dead for now. There will be a lot less oil available in the U.S. and the world market than there could have been, so supply will become constrained more than it should have been. While drilling today is not going to free up more oil, the issue is perception that supply will be constrained going forward and the unknown impact of war in the Mideast.
That is happening just as the threats to Middle Eastern oil flows are ramping up. Iran is clearly not backing off and will very likely step up its efforts to make the bomb even faster. All of this just drives the speculative price of oil higher and higher. There is nothing that is going to happen in the next few months to reverse that.
The result, as you all know, is that the price of gasoline this summer will possibly go to $5 or even more in some markets. At a time when personal incomes are not rising, or hardly at all, and participation in the labor market is at a 40-year low, there is no possible way many consumers are going to be able to pay those prices to take a driving holiday. Airfares will have to rise with the fuel cost increases that are coming. Food prices, already rising, will now rise much more as delivery costs rise. Corporate profits will get squeezed to some degree as fuel costs squeeze margins and the added costs are not able to be fully passed on. That equals less hiring and less major events.
Just as your operating costs rise due to fuel and food cost increases, you are hit possibly with lower occupancy and consumers reluctant to pay a higher average daily rate as the cost of gasoline keeps people closer to home this summer.
No chance for improvement
There is little to no chance the situation in Syria and Iran is going to get better for many months. Syria will continue to ramp up its civil war and revolution. Iran will become more and more concerned that it is losing its only regional partner. That will make them more irrational. Sanctions will become almost intolerable this summer when the international banking institution, Society for Worldwide Interbank Financial Telecommunication, stops all Iranian bank transactions going through its system. The Iranians have to be very concerned that the uprising in Syria is going to slop over into their cities. That will make them even more dangerous and irrational. While they would be really crazy to close the straits, there is no telling what a bunch of religious zealots might do if they feel threatened with losing their continued hold on power.
At the same time, Europe is far from out of its crisis. The Greek deal is just Band-Aids and bubble gum. It only delayed the day of reckoning. Greece cannot possibly meet the austerity without further economic decline, and that will lead to more social unrest over time. The French banks are still in major capital constraints as are many other European banks. Italy, Spain and France need to materially reduce spending. The result is less European tourists and business travel to the U.S.
As I have warned before, this is a time to really control costs, conserve cash and plan for the worst, while you and I hope I am wrong. The real squeeze will come as more and more debt maturities from the glory days of 2006 and 2007 come due. At the same time, it is well past when property-improvement plans need to get done. Servicers and banks now are of the view that you must either reduce your loan outstanding with a big pay down if you want an extension or hand over the keys. That is just ramping up now.
If the gas prices do continue up and cash becomes more constrained, you will see a lot more hotels come to market later this year and next. Congress is not going to pass any bill that orders lenders to just extend your loan. Those of you with cash to acquire will be in a very good position to strike good deals as the year progresses. Buy in 2012 and 2013, cash in big in 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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