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US Hotel Industry

US hotel industry's situation unlikely to change soon

Jan 28, 2010

It is a buyer's market for hotel rooms in the United States, and the situation is not likely to change soon.

Hotel occupancy rates have stabilized, but discounting of room prices remains rampant in many markets, indicating a slow recovery for the industry.

While most participants at a hotel business conference in San Diego this week said the bottom of cycle was near, they also saw no upturn before 2011.

"2009 was awful," PKF Hospitality Research President Mark Woodworth said in a conference presentation. "We believe that this year will be weak as well. The buyer's market will persist into next year."

Demand for both vacation and business travel has fallen sharply since the 2008 onset of the latest recession. In particular, the luxury sector and group travel have suffered as bailed-out banks and others sought to avoid being labeled as frivolous spenders.

U.S. revpar, a measure of occupancy and room revenue that is considered a barometer of lodging industry health, fell nearly 17 percent last year.

PKF expects a decline of 1.1 percent for this year, while Smith Travel Research has forecast a 3.2 percent drop.


With new hotels continuing to open, "supply hasn't begun to slow down," said Mark Lomanno, president of Smith Travel Research.

Construction on hotels totaling 50,000 rooms began last year, he said, while fewer existing hotels closed. During the real estate boom, the trend had been to convert some hotel properties into condominiums, which helped to tighten the supply of available rooms.

Meanwhile, U.S. hotel occupancy rates have dipped to record lows.

After averaging 55.1 percent last year, occupancy will tick up to 55.4 percent this year, according to a forecast from PricewaterhouseCoopers. That's still well below the 20-year average of 62.8 percent.

"We are not going to have pricing power until occupancy gets back up," HEI Hotels & Resorts Chief Executive Officer Gary Mendell said at a panel. "It's going to take two, three or even four years."

One of the biggest hurdles is the high U.S. unemployment rate, compounded by political uncertainties and a lack of confidence at corporations about whether to make new investments or hire more workers.

"We're in for a period of slow recovery -- there will be no springboard like in the past," said Thomas Baltimore, president of hotel, resort and real estate buyer RLJ Development LLC.


"Corporate accounts are clearly controlling their travel much more than they ever did historically," HEI's Mendell said.

Real estate investment trust Host Hotels & Resorts Inc sees negotiated group business and leisure travel as the best bet for future growth now that corporations have become more disciplined in their spending.

"The transient business traveler just never recovered from the peak in the '90s," Host CEO Edward Walter said at a panel.

Leisure travel has fallen less severely, and industry experts expect that trend to continue.

PricewaterhouseCoopers expects consumers to gradually increase travel spending in the year ahead.

The "family-oriented get-together is still happening," said Mike Shannon, managing director at private equity firm KSL Capital Partners, adding that consumers are returning to "affordable luxuries" like haircuts, carwashes or even gym memberships.

"It's the $200 Lomilomi massages in Hawaii that are not doing so well," he quipped.

US hotel industry's situation unlikely to change soon
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