A recovery with legs, demonstrated with data and attitude
 
A recovery with legs, demonstrated with data and attitude
19 FEBRUARY 2010 8:00 AM

The light at the end of the tunnel is not a mirage. Things really are getting better, and this recovery is gaining momentum.

Whether you’re downright pessimistic, hedging your bets or completely optimistic, most hoteliers and others involved in hospitality are fully invested in the idea that 2010 will be “better.” This hopefulness is so pervasive it virtually hangs in the air and emanates from nearly every industry, household and corner of our economy.

Cameron Larkin

But let’s face it – January was not how we collectively hoped the year would start: the transactions market is still stuck, indecision rules, companies continue to shed jobs, Washington is gridlocked and bad news still dominates headlines. For many, and depending on your job, 2010 still feels like 2009: It’s not clear when your hotel will cover expenses again, when you’ll next collect a paycheck or commission, or when the bank might foreclose.

Recovery turning points are clear and obvious only in retrospect. The end of a downturn can bring some of the darkest, most confusing days – good news is mixed with still more bad, and positive momentum can appear to reverse all too quickly. That’s exactly where we are today.

So, then, why is the conventional wisdom that 2010 has to be better for the hotel industry? After 28 months of hotel recession, does downturn fatigue have us seeing light at the end of the tunnel, or, like a doomed traveler in the desert, are these glimmers of salvation just a mirage?

The light at the end of the tunnel is not a mirage. Things really are getting better. This recovery has legs. The data tells the story. Few are yet feeling the effects of the improving fundamentals, but if you could stand back to take in the whole picture, you’d clearly see the positive trends.

I’m a data junkie, and I’m also a realist. It’s going to be a difficult transition throughout 2010 and into 2011 for our industry. But it feels really good to start seeing so much positive information.

The economy

Gross domestic product historically has been an important indicator for hotel performance, and there is no compelling evidence that a paradigm shift has decoupled GDP growth from improvement in the hospitality industry.

Third-quarter 2009 GDP grew by an annualized 2.2 percent after four consecutive quarters of devastating decline, and fourth-quarter growth surprised on the upside at 5.7 percent. Don’t let the pundits talk off a good story; while some of the 5.7-percent gain was inventory-induced, 2.2 percent was driven by real, final, sustainable sales growth. Further, consensus estimates put first-quarter GDP growth at 3.7 percent. To put these numbers in perspective, the economy shrank 2.4 percent in 2009—its  worst year since 1946.

Many conservative economists forecast 2-percent annualized GDP growth during each of the next four quarters. Rising GDP leads to profit growth, business investment, job creation, consumer spending, business travel and a meaningful return of the family vacation. While this sounds like theory from a macroeconomic textbook, there’s data-driven evidence that the first part of the scenario is playing out. The hospitality industry will benefit, as it always does, with some lag to an improving economy.

  • Profit growth: Bank profits are coming in on the upside of expectations, resulting in both accelerated TARP repayments (to be diverted to community banks to spur lending) and the Treasury’s slashing $200 billion from estimated bailout package losses.
  • Business investment: Fourth-quarter 2009 equipment and software spending was up 13.3 percent while overall business fixed investments were up 2.9 percent on an annualized basis—the first increase in that category in five quarters.
  • Job creation: Unemployment showed a surprising drop to 9.7 percent in January from 10.0 percent in December. Manufacturers also added 11,000 jobs (the first increase in that measurement since November 2007), the length of the average workweek and hourly wages improved, and 52,000 temporary workers were added to the economy—all leading indicators of the sustained, net job growth we should start to see by late spring.
  • Consumer spending: Fourth quarter consumer spending was up 2.0 percent after rising 2.8 percent in the third quarter. Household net worth (US$53.4 trillion) has recovered US$5 trillion of the US$16 trillion lost at the depth of the recession. In addition, the turnaround in consumer credit is here as further tightening of lending standards for mortgages and credit cards has now passed.

According to Smith Travel Research, more than 215,000 fewer hotel rooms are sold every day compared with before the recession. Over time, an improving economy will absorb all of those rooms and more. The return of GDP growth was the most important first step in the current recovery, and we’re beginning to see the knock-on effects of an economy coming out of a long hibernation.

To see more STR data in a PDF document, click here (free HotelNewsNow.com registration required).

Government programs

The government’s current focus on bank regulation is a sign that Washington believes the worst of the financial crisis is past. Politicians are looking now to avert the next catastrophe through new regulations and find a way to pay the bills from the current bailout.

The Federal Reserve also is in the process of ending several lending programs started during the worst of the financial crisis. One of the biggest of these, the US$2.2 trillion mortgage-backed-security purchase program, ends at the end of March.

The government is feeling confident enough to start taking the “water wings” off the economy. Soon the private economy will gain enough momentum to swim on its own again.

Hotel Industry Leading indicator

I’m a big fan of the HIL indicator developed by e-forecasting.com and STR. During December, the HIL was up for the ninth consecutive month. This further supports an industrywide turning point in the summer-fall timeframe.

Attitude

I tend to prefer data to emotion to explain things. But I think it’s relevant here to give a nod in equal parts to both an aspect of American exceptionalism and how we recover from terrible events. It’s about attitude. As it pertains to recovering from a Depression-like recession, this is where the can-do, anything-is-possible American spirit runs headlong into the Kubler-Ross model, which describes the necessary five stages of grief through which we must process loss (denial, anger, bargaining, depression, acceptance). Optimism alone won’t pull you from a hole, but without it you’ll never get out. It is precisely the return of a winning attitude after toiling through the hardship that will cumulatively get our hotel industry and economy humming again.

And it’s the return of that attitude that is going to have a lot of people feeling as though they deserve a nice long vacation (with accompanying hotel roomnights!) as we climb out of this recession.

Wild cards

Several wild cards remain, and below is a short list of just some of the more important issues to watch during 2010.

  • Ability of hotels to recapture rate;
  • European sovereign debt crisis (a growing new story);
  • When lending improves;
  • Political gridlock and results of the 2010 elections;
  • Market reaction to unwinding of bailout programs;
  • Timing and strength of jobs growth; and\
  • Housing recovery/foreclosure mitigation

Summary

The recovery looks better than it feels. But it’s a recovery nonetheless; it’s real, and it has legs.

It’s going to be another grind of a year, at least through the first half. But I’m also optimistic that most people will have a reason to smile again or at least breathe a big sigh of relief at the end of the year. Good days lie ahead.

Cameron J. Larkin is managing director and founder of Larkin Hospitality Finance, a national hotel investment-banking firm focused exclusively on meeting the debt and equity financing needs of hotel owners and developers. He can be reached at clarkin@larkinhf.com or (469) 916-8518.

The opinions expressed in this column do not necessarily reflect the opinions of HotelNewsNow.com or its parent company, Smith Travel Research and its affiliated companies. Columnists published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.

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