Gas prices, dollar, supply growth raise flags
19 FEBRUARY 2015 7:04 AM
While the industry’s fundamentals continue to cruise, some hotel leaders are worrying about the impact of oil prices, the strength of the dollar and supply growth.
MEMPHIS, Tennessee—Reduced oil prices and a strong dollar might actually be slightly hurting United States hotels, which are experiencing what some experts consider the most successful period in the industry’s modern era.
Speaking during a dinner held in conjunction with the recent Memphis Lodging Update, several industry leaders said they were slightly concerned about the effects of energy costs.
- “When the cost of gas to the consumer is down it has the perception to encourage them to travel,” said Don Houseworth, founder of Houseworth Hotels, and who owns four hotels in Blytheville, Arkansas. “The bad part of this is … the steel mills are laying off because of lack of demand. It’s going to be a negative thing.”
- “I don’t think we’re seeing a lot of new occupancy because of the price of gas,” said Dan McEwan, principal of Maximum Hospitality, a Memphis-based hotel management and development company. “We’ve seen two projects in Texas stopped … (because) compression from two hours away that’s going to affect it.”
- “We are concerned about oil and gas,” said Don Howard, president of Lexington, Kentucky-based H&W Management Company. “There’s been a little bit of an impact already.”
Like all aspects of the hotel industry, the effect of oil prices varies by market. Howard said some of his company’s properties in eastern Kentucky have been affected by a downturn in the regional coal industry.
“We’re looking for markets with demand generators … medical, university, government’s OK,” Howard said. “I love universities. … They just keep on chugging.”
“It’s market-specific,” added Greg Marcus, president and CEO of Marcus Hotels & Resorts, a Milwaukee-based management and development company with 20 hotels in its portfolio. “In Oklahoma City I can start seeing the impact.”
Marcus said if current gas prices stand and a consumer uses 700 gallons of gas annually, he will have an extra $1,600 in his pockets to spend, which can’t be a bad thing for hotels.
The biggest question mark revolves around who benefits most from low oil prices, said David Pear, a hotel consultant with Memphis-based Pinkowski & Company.
“(The price of oil) is never good for everybody at the same time, so how does that balance out?” he said.
Dollar’s strength has a down side
Meanwhile, leaders also are keeping tabs on the strength of the dollar overseas.
“The dollar is a little too strong,” said Jim Holthouser, executive VP of global brands for Hilton Worldwide Holdings. “It ends up harming big gateways cities like New York, San Francisco and Chicago.”
And that raises a big question for the industry, according to Pear.
“What happens in gateway cities when the value of the dollar starts affecting inbound travel?” he asked.
Marcus said the demand growth has been driven by more employment, which leads to more discretionary travel spending.
Holthouser said he believes there is still a two- to three-year run for the current cycle—even though rate transparency has hampered rate growth.
The hotel industry’s elongated growth cycle has been spurred by a favorable supply-demand equation—something that might be coming to an end, said Lee Hunter, COO of Atlanta-based Hunter Realty.
“There’s more new supply out there than everyone’s talking about,” he said. “Everyone seems to have five to 15 hotels in the pipeline. I don’t know if the new supply is getting as much attention as maybe it should be.”
Construction and renovations
Additional supply and construction costs could put more pressure on the demand part of the equation, the speakers said.
Howard said he prescribes to the theory that average daily rate should be about 1% of the development cost per key.
“If it costs us $100,000 (per key to build), we’ve got to get $100 dollars in rate,” Howard said. “Then we run 65% occupancy and we can get 15% return.”
That return is more difficult to ascertain when renovations and property improvement plans are thrown into the mix.
“It’s not always about analyzing what (return on investment for renovations) is going to be,” said Pace Cooper, president & CEO of Memphis-based Cooper Hotels, which has 19 hotels in its portfolio and $25 million in improvements underway. “Sometimes you have to just do it as a means to protect the values of the properties you have.”
“Time and time again it’s proven if you put money in the right branding, it brings return,” he said.
Cooper said that often the most important element of a renovation is out of a hotelier’s hands.
“I don’t mind spending money; it’s just so painful how long the lead times are, how long it takes to get the money, how long it takes to satisfy the franchisor and take care of your (own company),” Cooper said. “That’s the biggest enemy to me—not getting the renovation out quick enough.
“Until we get the product really right we can’t demand of our customers to pay (the premium rate),” Cooper said. “The biggest challenge in our business now is getting our product right fast enough, so sometimes you have to make a decision to spend more to get it done faster. The faster you can get your stuff in shape, the longer you’re going to be able to enjoy this heyday.”
Wayne Tabor, GM at the Holiday Inn Select Downtown in Memphis, said he learned all about the time element involved in renovations last year when his property renovated 140 of its 192 rooms in three and a half months.
“There’s a short window to get it done,” Tabor said. “The flip side is you tick off all your guests—you stay open and your guest scores plummet. It takes a year to get the guest scores back.
“If you draw it out you’re losing more in revenue than you are in saving costs,” he said.