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Hotel Squeeze
by David Stanowski
04 June 2009


Abstract:
The hotel industry is currently being squeezed by increasing supply, due to the huge surge in hotel construction in recent years (many of these projects are just now being completed), and falling demand due to the worldwide recession.

Introduction:
A recent Ipsos/Reuters poll done in the 23 most developed countries found consumers cutting back on many expenditures due to the worldwide recession. People are focusing their spending primarily on necessities and reducing the money spent on luxuries, and many things falling into the leisure/recreation/entertainment category. Note the number of people reducing the money spent on vacations!



The hotel industry put itself in a very difficult position by going on the biggest building boom in the last four decades, which didn't even peak until
3Q 2008, and as the new units come on line they are producing a glut of rooms. The lodging industry fell prey to the same magical thinking that infected the entire real estate sector during the recent bubble.

Lodging investment continued to grow right into the recession - suggesting very loose lending standards for new hotel construction.


Notice what this surge in building has done to the supply and demand curves.


The next chart shows that weekday lodging (business travel) has fallen off much more than weekend lodging (leisure travel).


Full Report: U.S. Lodging Industry Overview

The latest data from Hotel News Now for the week ending 30 May shows, on a year-over-year basis, the industry’s occupancy rate fell 10.2% to end the week at 51.6%; the average daily rate dropped 9.6% to finish the week at $93.00; and revenue per available room [RevPAR] for the week decreased 18.9% to finish at $47.96.




Conclusion:
"When contrasting this downturn with others, one of the most important differences is that as demand has declined to historically low rates, supply is still increasing!" If the second leg down in the recession begins later this year, as expected, the lodging industry must prepare for tough times ahead!

Stories like this one in Phoenix are becoming all too common around the country:
"In all, at least six major Phoenix-area hotels, five of them resorts, have gone delinquent on their loans or sought bankruptcy protection since last fall. Two of those had opened in recent months, and two others had recently completed renovations."
Phoenix Bears the Brunt of Hotel Market's Steep Downturn
 

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