Mobile Edition
Print
Get the Mag
Weekly UpdatesTogether, the recession that has hit full-stride and the credit crisis that began last summer are taking a toll on the U.S. lodging industry. As 2009 takes shape, the industry is faced with growing supply, shrinking demand, and lower room rates. This downturn is industry-wide and affects all the major industry segments regardless of price category or location criteria. All of the major markets are in the same situation, with only varying degrees of magnitude separating the best from the worst markets. Clearly, the industry is suffering from a severe recession that is unlike what most people involved in the industry today have ever witnessed.
In reviewing 2008, it is readily apparent that the year had two components: one prior to September and the other from September to December. For lack of a better argument, we point to the collapse of Lehman Brothers as the turning point for the industry as credit markets froze and business activity came to a screeching halt. Throughout this time we were paying close attention to the New York City lodging market, realizing that the first sign of a downturn would be at the epicenter of the U.S. financial industry.
New York City hotels and the lodging industry in general were holding up quite well through September, with demand up 3.3 percent in New York City and down only 0.6 percent year-to-date for the rest of the country. Room rates were still rising, up 7.4 percent in New York City and up 3.7 percent nationally. By the end of September and the beginning of October, it had become apparent that the industry's fundamentals were deteriorating rapidly and that we were in for a severe downturn. By the end of October 2008, while the overall industry continued to report modest performance, New York City hotels were scrambling, and we began hearing reports of discounting and altering the customer mix to build occupancy. For October, hotels in New York were reporting a 4.3 percent decline in demand and a 3.1 percent decline in room rates. By the beginning of 2009, the financial industry meltdown was quickly becoming a disaster for New York City hotels, with properties in that market experiencing double-digit declines in both room demand and room rates.
[GRAPHIC OMITTED]
In addition, the pain experienced by New York City hotels was spreading across the country. For the twenty-eight days ending January 24, 2009, the U.S. occupancy rate was 13.6 percent below the same period last year and room rates were down 2.7 percent. During this same time period, revenue per available room declined for all industry segments and twenty-four of the top twenty-five markets. (The sole exception was Washington, D.C., where hoteliers were greeted by some 2 million visitors for the presidential inauguration ceremonies.) Revenue per available room (RevPAR) for New York City hotels was down more than 20 percent following a 12.9 percent decline in occupancy and an 8.6 percent drop in room rates. However, this was hardly the worst-performing market, as Atlanta, Phoenix, and Seattle all suffered RevPAR declines of about 26 percent.
The same was true in the major price and location segments. By price, the luxury segment, which normally can be expected to withstand the initial stages of a recession, has simply been hammered. Room rates for this segment were down 12.8 percent for December 2008 and 6.0 percent for the twenty-eight days ending January 24, while occupancy declined 11.5 percent in December and dropped 15.2 percent for the first part of January. The other high-end segments have also been hit hard, with declines only slightly less severe. By location, urban, suburban, and resort properties have been some of the hardest hit.
[GRAPHIC OMITTED]
One of the biggest problems for the industry is the continued growth in room supply. With hindsight it is apparent that the modest performance of the industry during the first nine months of 2008 lulled developers into a false sense of stabilized growth. As mentioned previously, one of the most significant differences between the current industry downturn and the previous three downturns was the direction of room supply growth. Previously, while supply growth has been higher than it is currently running, it was at least trending downward at the moment demand softened. This time, room supply was on an upward trajectory when the recession hit, further aggravating the current difficult environment. As we closed out 2008, room supply for December was 3.4 percent larger than December 2007. With more than 185,000 rooms still under construction, it does not appear that the room supply growth rate will peak until well into 2009. We can only hope that this number will start trending down rapidly as we move into the second half of the year.
Developing a forecast in this environment obviously is difficult. There is virtually no clarity of any coherent trends in many of the traditional variables used as indicators for the industry. While gas prices have declined dramatically and have the possibility of generating huge summer travel, that season has yet to begin, and oil prices are susceptible to swift changes in a fairly short time frame. Otherwise, virtually all of the usual indicators, ranging from consumer confidence to industrial production, are all heading downward at this writing.
[GRAPHIC OMITTED]
There is an ongoing debate about the forecasts for the industry for 2009: are we in for double-digit declines in RevPAR or only high single digits? At this time, we are still in the latter camp with a projection of -5.9 percent in RevPAR based on a decline in occupancy of 4.0 percent and decline in room rates of 2.0 percent. About the only trend of which we are truly confident is that these projections will change again by the end of the year.
Randell A. Smith is the cofounder and CEO of Smith Travel Research.
FEED