Sector Spotlight
Lodging REITs in the eye of the storm
by Lynn Novelli
Against a somber back-
drop of corporate
cost-cutting, consumer
caution and a 60 per-
cent decline in share
prices in 2008, lodg-
ing REI Ts face stiff headwinds
in the months ahead. Analysts
expect challenges to persist into
early 2010, with signs of a slow,
protracted recovery emerging by
the second half of next year.
The main hospitality industry
drivers—GDP growth, corporate
profitability, employment and
consumer confidence—are expected to remain negative for the
next nine to 12 months, exerting
substantial pressure on lodging
fundamentals, according to some
analysts. “2009 presents a very
difficult operating environment
for lodging REI Ts, characterized
by incredible uncertainty, belt-tightening and unemployment,”
says Green Street Advisors
analyst John V. Arabia.
Declining Demand
Challenging economic conditions produced fewer travelers, depressing demand for
hotel rooms, reports Robert
W. Baird & Co. senior real
estate research analyst David
Loeb. Consequently, he notes,
“Demand—the primary driver
of REVPAR—will continue to
be weak throughout 2009.”
As the recession deepens,
airlines are expected to slash
capacity even more this year,
particularly to leisure destinations such as Phoenix and Orlando. Meanwhile, businesses
and families are reducing travel
as a way to reduce expenses. The
result, according to RW Baird
researchers, will be a contraction
in the hospitality sector equal
to the one that occurred in the
wake of 9/11.
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In this situation, “it will be
difficult for hotels to maintain
their rates, whether you look
at individual leisure travelers
or corporate volume accounts,”
Arabia says. “Companies with
negotiated rates are asking for
concessions from the hotel companies in return for their business. Additionally, we are seeing
some markets like Las Vegas
discounting pre-existing rates—
that’s a dangerous trend that
will impact other markets.”
Nap Overton, a security analyst with Morgan Keegan and
Co., reports that the predominant advice at lodging industry
meetings so far this year is for
operators to avoid discounting
rates. “That’s easy to say,
but, in reality, it is difficult to
do,” he says. “With occupancy
down, how well operators hold
on to room rates is the key
issue.”
Soft demand and downward
pressure on room rates could
drag REVPAR down by 7
percent to 8 percent compared
with 2008, Arabia says. “We
will continue to see very sizeable
REVPAR declines in the first
half of 2009,” he notes.
Trickle-Down Effects
All hospitality subsectors are
sharing in the pain of declining occupancy and negative rate
growth, but luxury and upper-upscale hotels seem to be taking the
hardest hit. LaSalle Hotel Properties (NYSE: LHO) CEO Jon
Bortz anticipates as much as a 4
percent drop in demand at luxury
properties this year, a magnitude
of decline that hasn’t happened
since the 1930s, he says.
