The mood at last week’s Lodging Conference was buoyant—even giddy—a possible sign the hotel industry is headed for another fall.
I’ve written this several times before and I was wrong then, and I’ll probably be wrong this time. But I’ll say it again: Maybe this time will be different.
By different, I mean perhaps hotel owners and investors will have learned from history and their past mistakes to create a hotel investment and development marketplace that’s sustainable and resistant to recurring shock waves.
Whenever the hotel industry is in the upward swing of its natural cycle, as it is now, a lot of owners, developers and lenders start to believe the current economic environment is unlike any previous cycle and, therefore, will last longer—maybe even forever. It’s never been true in the past, and we’ll see if that kind of wishful thinking works this time around.
At the 19th annual Lodging Conference last week in Phoenix, the talk among most speakers seemed to imply the laws of physics—i.e., what goes up must come down—don’t apply. The mood was buoyant, even giddy, and as expected, more than a few speakers talked about the frothiness of the market.
Despite the uplifting talk, there are a few reasons to worry:
- While the forecast from STR, parent company of Hotel News Now, points to a continued positive balance between supply and demand (demand is projected to increase 2.2% this year and 2.4% in 2014, while room supply will grow by 0.8% this year and 1.1% next), nearly everybody I talked to at the conference—owners, developers, lenders and, of course, brand executives—were talking about building new product.
But as John G. Murray, COO and president of Hospitality Properties Trust, warned during a general session last week, “Supply growth has always been the final dagger to our cycles.”
- Another sign of increased frothiness in the market has been the general softening of lending terms. Not too many months ago, lenders were typically extending financing with loan-to-value ratios of 50% to 55%. Last week, several speakers offhandedly spoke of LTVs as high as 70% to 75%, a sign too much capital is chasing not enough deals.
On the other hand, a number of positive signposts portend the possibility the industry will maintain its forward momentum for at least several more years:
- The most recent recession was particularly brutal, with lots of casualties among hotel owners. Those who made it through either unscathed or slightly wounded are stronger and better prepared financially and operationally for whatever challenges lie ahead.
- While most previous hotel industry downturns were a result of massive overbuilding, the most recent one was a byproduct of the cratering of the global economy. As a result, the industry hasn’t had to absorb the excess supply before moving forward.
- Lenders seem to remember some of their past foolishness—e.g., LTVs above 100%—and are committed to maintaining some discipline in their underwriting. Time will tell whether these attitudes will hold.
- The U.S. and, to a certain extent, world economies are slowly but surely improving. Economist Bernard Baumohl of The Economic Outlook Group told conference attendees last week there’s a 50% chance U.S. gross domestic product will grow above 3% this year and next and only a 15% possibility the economy will slip back into recession.
On balance, there seems to be more positive influences on the hotel industry than negative ones. However, if history is a guide, at some point development will ramp up beyond the growth in demand, lenders will completely open their financing spigots and developers and owners will make some dumb deals.
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