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Outlook for 2009 is bleak for US hotel industry

Written by editor

Though the novelty of this dreadful thought may have worn out in the last months and trade people don’t want to hear it any longer, experts paint a gloomy picture of the industry over the coming mon

Though the novelty of this dreadful thought may have worn out in the last months and trade people don’t want to hear it any longer, experts paint a gloomy picture of the industry over the coming months, over 2009, carried forward to two more years.

Yes, the message from expert is clear: 2009 will be a lousy year.

Even forecast numbers have dramatically dropped since December 2008 when Lodging Econometrics said there will be 457, 274 new rooms coming online worldwide with 2982 new hotel openings. A month later, this year they say there are only 425,615 rooms to be delivered with 158,851 of those to open in the US. Last year, around 135,070 rooms were built, showing only 23,000 rooms will be added in 2009, according to their construction pipeline report for 2009.

Dr. Bjorn Hanson, clinical associate professor, NYU Tisch Center for Hospitality, Tourism and Sports Management, further brings bad news. He said following years of record spending levels, 2009 is forecast to be the first year since 2003 that the US lodging industry will spend less on capital expenditures than the prior year. “The forecast for the coming year is for capital expenditures of approximately $3.75 billion, which represents a decrease of over 30 percent from 2008. An estimated $5.5 billion, a record amount, was invested in capital improvements for existing US hotels in 2008,” said Hanson, adding the decline is from a record level spending, hence the decrease is pronounced.

On the sunny side, the US lodging industry is in the best physical condition it has ever been based on 5 years of record capital expenditures. Hanson said, “The industry has been spending record amounts on capital expenditures. As a result, the hotels are in the best shape. Today the industry will withstand deductions in spending without being evident to guests.” So unlike in past periods when capital spends went down, guests are unlikely to notice the absence of “makeovers” this year.

There will be 1 to 3 percent fewer occupied hotels rooms in the US in 2009 and a lower average daily rate of 2-5 percent, resulting in a decline in RevPAR (revenue per available room) from 2.5 – 12 percent, as forecast by industry analysts. Coming off from its 2008 expected occupancy of 60.4 percent, the Smith Travel Research total US occupancy percent change report is not far off market consensus. Its 2009 forecast of -3.5 percent drop from 2008. If it bids well, STR projects only a slight -.6 percent dip to 2010 from 2009.

Occupancy will be the lowest since 1971, at 56 to 59 percent only. As of February 2009, there have been 16 consecutive months of occupancy decline in the US; it was only 12 months following 9-11. The longest period of decline was between 1990 and 1991 when occupancy was lowest for 18 months in a row, revealed Hanson.

Certainly, the nosedive was faster than expected by hopeful stats given out by travelhorizons and Ypartnership. In that, 71 percent of leisure travelers travelhorizons survey said still intend to take an overnight trip of 50 miles or more than home in the next 6 months. Same numbers were used by Peter Yesawich, CEO of Ypartnership, who forecast households planning trips in the same period. Yesawich added that 48 percent said their travel plans would not change as a result of the financial crisis. He said, “Some 3 out of 10 US leisure travelers are willing to select a different destination if the offer is sufficiently compelling.”

In the last 30 days, forecast occupancy numbers have tumbled faster than leisure trips to be taken in the next 6 months.

Because of fewer occupied rooms, US lodging industry fees and surcharges in 2009 will decrease too. This decline follows a 5-year period between 2003 and 2007, of steady increases and record amounts collected in. Hanson said, a 1-3 percent decrease in fees and surcharges in 2009 will reflect the decrease in occupancy, which is the approximate drop in occupancy in various lodgings. In 2008, fees collected were $1.75 billion, while this 2009, forecast fees and surcharges may end up at $1.65 billion.

Dr. Hanson said some hotels will reduce or eliminate the surcharges because the industry will not take any chance of offending guests. Fees and surcharges introduced and collected over the last years include amenity fees, early departure fees, reservation cancellation fees, internet fees, local calls, business center fees, room services delivery surcharges, bartender charges, set-up of meeting rooms/and when food and beverage are served, and fees for master folio billing.

Charge for local phone calls may be reduced to a $1 to $1.50. Charges that may be scrapped include high-end hotels’ surcharges for housekeeping (sometimes running up to $12 like an automatic gratuity) – a cost that has offended a lot of guests. Occupancy surcharges will remain, as they are dictated and collected by the municipalities themselves. Hanson said that municipalities will most likely increase those taxes as they require more municipal revenues. “Those who will be paying those fees will be the visitors from other cities. This can backfire because meeting planners and travelers may get upset by this rate increase and may rather take their business elsewhere to another city in this economy,” said Hanson, adding early checkout fee may not be eliminated, although some hotels may be flexible about it.

Average daily rates will also suffer, being the largest decline ever in history. Hanson said ADRs will slide from 2-5 percent further.

Also, in a period of declining industry performance, many discretionary projects will be canceled or postponed, said Hanson. Projects on preliminary planning or ‘counsel’ received about 50 percent cancellation, thus far. Projects in the development stage show 1-2 percent cancellation. The cancellation discrepancy between pre-planned and ongoing projects is huge due to the very nature of the hotel business: long period of planning, nature of management and license agreements, architectural design process, etc. And the decline will be everywhere. No specific market will be exempt from the cancellation at preliminary planning stage. “But the biggest proportion of cancellations will be in New York, Las Vegas, Orlando and Hawaii,” said Hanson.

Further, many brands and management companies are waiving new requirements to assist owners in this period of meltdown. Some installation of the new in-room entertainment systems, upgrade of business centers, re-concepting of restaurants appealing to GenXers and Millenials, and upgrades of lobbies may be skipped until the recession is over. “But what will not be compromised will be high-speed internet access, beds and beddings, new signage (except new logos) at the properties,” said Hanson.

Alarmingly, the US has already exceeded the longest lodging recession compared to 9-11. This year is looking like the lodging crisis in the 1970s. When asked how the industry will look in a depression, Hanson said more hotels will shut down, hoping that it does not happen.