Two subsets of the hospitality industry that have been hit hard by the recession, the conventions and meetings business and the real estate transaction market, dominated topics of conversation at a recent roundtable event moderated by Hotel & Motel Management.
A number of industry experts—those who are in the owning and operating trenches day in and day out—gathered in late July at the Hyatt Regency Bonaventure in Weston, Fla., for the Executive Forum on Conference Centers and Group Business sponsored by Hodges Ward Elliott and Gallagher Insurance.
A reduction in business travel, the trade down of brand segments, the emergence of teleconferencing, all topped off with the negative rhetoric from Washington, D.C., toward companies holding events has left convention and resort hotels scrambling to determine if and how they will recover.
“For revenues to return, we have to start encouraging travel,” said Curtis Dean, VP of Roberts Hotels Group. “[Politicians] can’t make those statements. We constantly need to respond when we hear things like that.”
Instead of pleading for politicians to take back their statements, John Hamilton, SVP of acquisitions for Pyramid Hotel Group, said hoteliers should paint a picture to show politicians who is affected by similar statements.
“The most effective message we can deploy is to think about the employees,” he said, ironically days before the iconic Hotel Bel-Air in Los Angeles announced it would close for two years and layoff 300 employees.
“That’s a message the current administration could understand,” he said.
Those participating were in agreement that the negative perception from Washington will eventually subside, but that the damage may already have been done.
“Spend per guest is way down,” said Robert Morse, managing principal and COO of Noble Investment. “The opening reception is gone, a three-night stay is down to two nights, it’s affecting the patterns. The lead generation is so much lower.”
Dean said the effect of statements from Washington scolding businesses for holding meetings in resort destinations has been understated. He said it has led to companies “playing the allocation game so they can look like they’re competitive.”
“The impact on revenues is greater than everyone is saying,” he said.
Hamilton said it has forced companies to shrink the number of staff members that attend these conventions, basing their decisions not on who should attend but rather on what the public perception would be.
“The cutoff now is VPs and up,” he said. “Fewer people are allowed to participate.”
Many of these resort and convention properties are forced to fill rooms with transient business, which Bruce Wiles, COO for Thayer Lodging Group, said can be difficult. He said the branded properties are able to reach out to the transient group more efficiently.
“We used to have an 80/20 split business to transient. I don’t think it will ever go back to that,” Hamilton added. “We’ve spent an inordinate amount of time at our resort properties growing the transient push. Brands have been very helpful in that and deploying against those segments.”
“If you don’t have a brand, good luck filling a 1,000-room hotel without the national sales office,” Morse said.
Valuating product
The decrease in meetings and group business has had a domino effect leading to lower revenue per available room, and coupled with the frozen debt market has led to property values plummeting as much as 50 percent.
There are a number of factors in play, but all the hoteliers around the table agreed the industry is in the early innings of a devastating hotel real-estate market slump.
“When the kids go back to school in a month, and you start to get out of season, that’s when the real problem is going to hit,” Morse said.
Richard Millard, chairman and CEO of Desires Hotels, said occupancy numbers are either flat or up at each of its 10 high-end, boutique properties. The kicker, he said, is that rate is off as much as $120.
“People say, ‘why can’t you get a better rate?’ If we raised the rate, we’d lose all of the business,” he said.
Because hotel values have fallen, sellers are uncomfortable bringing properties to the market and many hotel owners are finding themselves unable to make mortgage payments. Bill Lenihan, managing director with Hodges Ward Elliott, said as of July there were 460 hotels in special servicing (hotels in which mortgages were being handled by companies that deal with loans) that are about to go into default. Nearly 1,200 hotels are assigned a special servicer but aren’t quite there yet, he said. At this time last year, Lenihan said, there were less than 100 hotels in this predicament.
“There’s going to be a lot more product coming to the market as [commercial-mortgage backed security] deals come due,” said Leslie Ng, CIO for Interstate Hotels & Resorts.
As unfortunate as this is for hotel owners in default, it presents myriad opportunities for investors who are currently in the market to buy and are able to obtain financing. Wiles said Thayer is positioned to purchase property but can’t seem to bridge the gap between current values and sellers’ expectations.
“We’ve been putting out offers, but no one is accepting them,” he said.
Morse said Noble is in a similar boat, constantly looking at the transaction market, but that he is only looking at “the right deals.” Hamilton said plummeting values are setting investors up to make a lot of money on hotel real estate.
“If you can get assets at 20 or 30 cents on the dollar, and you can right now, it’s always a smart investment,” he said.
“If we’ve learned our lesson and don’t load our hotels with overhead, there will be a good margin of revenues,” Ng added. “People buying assets now will really make some money.”
From a management standpoint, Hamilton said there will be many operating contracts coming to the market over the next few years as lenders and special servicers take back hotels and need experienced operators to take over management.
Millard agreed, saying there is no better solution than to let the hotel industry fix the problem it has created.
“Who knows better than us how to operate these things?” he said.
jfreed@questex.com
