Reservations about the economy; hotel operating results are strong, but a softening U.S. economy is the wild card in the hotel i

Looking ahead, Gordon foresees "fairly strong growth prospects" for limited-service hotels. "Full-service, though, will show continued weakness as the economy sends negative signals faster than before," she says. Propping both of them up is the weakness of the dollar triggering more foreign tourism, she concludes.

New demographic group emerges

On the demographic side, a major new group has emerged, representing a significant source of revenue for hoteliers.

It's the echo boomers--sons and daughters of baby boomers--also referred to as Generation X and Generation Y. Sources say hoteliers are meeting the demands of this emerging demographic group as they do with other groups, by anticipating and meeting their needs and preferences.

McInerney says the AHLA has established an under-30 council of hoteliers to create marketing programs aimed at Generation X'ers and Y'ers. At the same time, hotels are being renovated to appeal to this group. One of the primary moves is to wire the hotel to provide Internet access throughout.

Softer lighting, user-friendly amenities such as conversation tables in lounges and sitting areas, and remote check-in and check-out are some of the other features being implemented to cater to younger customers. Mandigo notes that hotels are also hiring younger supervisory personnel, who are taking more of a role in operations.

On the sales front, despite some slowdown in 2007 transaction activity, the hotel market was still strong enough to register record results for the year, according to Jones Lang LaSalle Hotels.

Jones Lang LaSalle says major hotel sales of $10 million or more completed in 2007 totaled a record $45 billion versus the 2006 volume of $35 billion--a 38 percent increase.

On the lending front, as noted earlier, sources interviewed in the first quarter of 2008 agree that lenders haven't pulled away from the hotel market, but are being more conservative.

McConnell comments, "There are currently plenty of lenders who think hotels are a good bet. They're more selective, so the market is less competitive. But there are numerous financial options for hotel owners."

"Lenders aren't pulling back," adds Marx. "There's so much international travel [in the United States] that demand is high for rooms."

It's an active market on the investment side, as reflected in hotel sales figures. "There are plenty of dollars looking to get into our industry, probably investing through equity funds versus individual investments," says McInerney.

McConnell agrees. "From the equity standpoint, the market is very strong with a lot of investment capital available."

Keeling, however, says investors are having a hard time finding product at a price they're willing to pay. "There are still deals to be had," he adds.

What are the main concerns of hoteliers for the remainder of 2008 and into 2009? Sources cite the threat of a recession and finding people to fill jobs among the foremost.

To get a closer look at the hotel market, Mortgage Banking interviewed industry sources in one of the most successful hotel markets: San Francisco. Here's what we found out.

SAN FRANCISCO

San Francisco, a world class destination for leisure travel, has a strong hotel market with occupancies ranging up into the high 70 percent range, according to industry sources.

Rick Swig, president of San Francisco--based RSBA & Associates, hotel consultant, says the solid market is also the result of good balance between supply and demand, and a diversified economic base.

Sees business growth

"The leisure travel market is strong here, with international travelers taking advantage of the weaker dollar," Swig says. "In addition, our high-tech and biotech businesses are in growth modes. These segments are based on much stronger fundamentals than the previous [dot-com] meltdown. Adding to the mix is strong corporate and convention business."

He adds, "When you combine ongoing demand exceeding new supply, our hotel market will be healthy for the next several years."

Swig cites a 1.1 percentage point gain in 2007 occupancies over 2006, at 77.5 percent versus 76.4 percent. RevPAR increased 9 percent from $128 in 2006 to $139.50 in 2007. For 2008, he forecasts a 0.5 percentage point gain in occupancies to 78 percent, and an 11.1 percent gain in RevPAR to $155. On the financial side, he concedes that the credit crunch has slowed transaction activity.

HVS International's Mellen concurs on the strong 2007 operations market, and agrees that the credit crunch did not affect demand in the San Francisco market. Where it did have an effect was in slowing investment activity, she points out.

"The cost of capital is up now, there are fewer lenders, and uncertainty about hotel performance has created a disconnect between buyers and sellers," she explains.

Thomas Callahan, president and chief executive officer of PKF Consulting-San Francisco, agrees that the credit crunch had little effect on operating results, but sides with Mellen that transaction activity has slowed as a result.

Swig says the hotel market can be expected to peak in 2008, with slight falloffs in 2009 and 2010. Looking ahead, he says he anticipates "an especially good year" for San Francisco hotels in 2008.

Mellen, though, believes the outlook is uncertain. "We're hearing about weaker spending, which may lead to lower occupancies and some softening in terms of RevPAR," she cautions.

Callahan foresees a positive outlook for 2008, with stable occupancies in the 78 percent range.

Sources are unanimous that rising gas prices have had a negligible effect on the San Francisco hotel market.

The new wave of Generation X and Y customers, Swig says, is on every hotelier's mind. "Hotel operators are making moves to make hotels more 'green' and establish friendly atmospheres," he says. "Other measures include incorporating high-tech throughout the hotel for high-speed Internet access, and establishing informal public gathering areas."

Mellen concurs, saying, "Everybody is fine-tuning toward whatever the X and Y'ers want. Technology is being installed throughout in rooms, conversation centers are being established, and spas are being provided as well as other services oriented toward these customers. Also, younger supervisory personnel are being hired."

Mellen adds the San Francisco hotel market mirrors national lending conditions with fewer sources of capital, lower LTVs and higher equity requirements.

Buyers and sellers show disconnect

In the hotel investment side of this market, Swig says, "Investors are looking for deals--but there's a big time disconnect between buyers and sellers. The market says prices should be lowering, but sellers are not willing to discount or reduce their prices because of favorable hotel performance."

Callahan and Mellen agree on the buyer-seller disconnect. "There's a lot of investor interest in hotel properties, but uncertainty about how much to pay has created a stalemate in the industry," says Mellen.

Looking at the hotel industry as a whole, it's apparent strong operating conditions are creating opportunities for record income in the near-term. However, uncertainties exist on the financial side, and the industry is very sensitive to softening in the economy. Any downturn would have an immediate and adverse impact. MB

John Bell is a Chicago-based freelance writer. He can be reached at bell7287@sbcglobal.net.

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