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Weekly UpdatesAs we approach the end of 2008, the global credit crisis has created numerous problems for a variety of industries. Lodging is not an exception. Within our industry, the perfect storm has hit. Room supply is growing, room demand is shrinking, and room rates are declining. The combination of these three key industry statistics has led to an alarming drop in revenue per available room (RevPAR). Unfortunately, the industry-wide recession affects each of the major industry price and location segments and virtually all major markets.
It appears that the lodging industry entered the current downturn at the same time as the overall economy. Smith Travel Research (STR) reported the first monthly decline in room demand in December 2007, and while there have been a few positive months since then, the trend has generally been downward. Indeed, the decline in room demand accelerated in September 2008. By the end of the year, the demand for rooms was falling in excess of 5 percent each month.
We have watched room supply gradually increase throughout most of 2008, but since August, the number of room openings has greatly accelerated. By the end of the year, room supply was growing at 3.0 percent or more. As we began 2009, room supply was still growing, with more than 180,000 additional rooms under construction. This development is unusual. In past slowdowns, room supply was generally trending downward as we entered each recession, whereas this time around room supply is growing. Granted, in past recessions room supply was declining from a higher level than exists today, but at least the trend was headed in the right direction. This time around, we have yet to see room openings slow down. While we fully anticipate room supply growth to peak by the second quarter of 2009, we are still left with a significant influx of new rooms at the worst possible time.
To make the situation truly difficult, the industry has begun fairly drastic rate discounting. While I do not wish to reiterate our objections to rate cutting, the depth and breadth of the rate slashing has been stunning. October 2008 was the first month in which rates actually declined from year-earlier levels. By the end of the year, the pace of rate cutting had also begun to accelerate. Within the industry segments, luxury properties have been the most susceptible to discounting, with average daily rate (ADR) declining more than 7.0 percent from year-earlier levels. Properties in some of the major markets were even reporting double-digit declines in room rates.
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Obviously, these trends have taken a toll on RevPAR. For most properties, markets, and segments, double-digit declines in RevPAR at the end of 2008 were the norm. While the luxury segment has experienced some of the worst declines, properties in New York, Chicago, Orlando, and Las Vegas have seen RevPAR declines in excess of 20 percent from year-earlier levels. These numbers are unfortunate reminders of what the industry experienced from the recession and 9/11.
As shown in the accompanying chart, the current downturn has similarities to the last recession in that demand began to decline as the year began. But whereas the industry began a fairly rapid recovery following the attacks of 9/11, we do not see that happening this time around. Clearly, the rebound is going to be slow and fitful. While it is always difficult to forecast the industry's performance, it is virtually impossible to do so at this time with any degree of reliability. Economic models simply cannot accept the current financial crisis as an input and project an accurate forecast. Guidance from the major companies is less reliable than normal since they do not want to disappoint investors. Looking outside of lodging, the problems in various industries (take your pick: financial services, automobile, airlines, construction) and the overall economy are so numerous and dire that the outlook is completely opaque.
Simply because there is a demand for the numbers, we have developed the following 2009 forecast for the industry: we estimate room supply to grow by 2.4 percent, room demand to decline 1.0 percent, and room rates to increase about 1.0 percent. While these are not terrible numbers, we do believe that the first half of 2009 will be an extremely difficult time period.
I cannot wrap this up without a comment about one truly bright silver lining: the collapse in energy costs in the second half of 2008 has been truly remarkable and will be of particular benefit to the lodging and airline industries. With cheaper fuel costs, travel will again become a dominant outlet for consumer expenditures, and next summer has the potential of moving the industry back on track.
Randell A. Smith is CEO of STR Global.
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