It was difficult to read the true mood of the speakers and attendees at last week's Midwest Lodging Investors Summit, produced by Lodging Hospitality. While there was a lot of uplifting talk about improvements in the hotel market—occupancies and RevPARs are unquestionably on the rise—in nearly equal measures speakers talked of the considerable challenges ahead—a weak financing environment, little growth in average rates and the looming specter of hundreds of millions of dollars of real estate debt that comes due in the next 24 months.
Here is a review of some random quotes from MLIS speakers that show both sides of the optimism/pessimism spectrum on display in Chicago:
• “New development has nothing to do with supply and demand,” said Jerry Cataldo, president of Hostmark Hospitality. “It's all about financing and once it comes back, there will be a rush to develop again.”
• “We've faced the same issue for decades,” said La Quinta President & CEO Wayne Goldberg in discussion of brand proliferation. “Not many new brands will reach critical mass in the next 10 years.”
• One of the few disagreements during a panel of industry CEOs came over the topic of online travel agencies and their effect on industry room rates. Goldberg of La Quinta believes Internet rate parity results in no effect on ADR, that a consumer gets the same rate whether he or she books on Expedia or a brand website. David Kong, president & CEO of Best Western, disagreed, noting a $100 rate on an OTA may only yield $80 to the property.
• Ravi Patel is executive vice president of Hawkeye Hospitality, one of the few hotel companies still developing (six under construction, nine opened in the past 18 months.) While he hasn't seen construction prices much lower during this era of limited development, “we've been able to receive better quality and value from the construction firms we deal with.”
• “When it comes to controlling expenses, cut where the guests will never see it, but never cut marketing,” said Mark Skinner, partner with The Highland Group. “If you do cut marketing, you'll never get out of the hole.”
• “In the hotel industry's new normal, some secondary markets may no longer be viable locations for luxury hotels,” said Jim O'Shaughnessy of Cornerstone Real Estate Advisors, citing the recently deflagged Ritz-Carlton in Dearborn, MI. “These are markets where it will no longer be possible to get luxury rate premiums.”
• Similarly, O'Shaughnessy believes owners of upper upscale properties, especially in high-cost urban areas, need to carefully scrutinize the viability of their food and beverage operations. “In many of these hotels, it may no longer be sustainable to offer food and beverage as an amenity,” he said.
• Steve Van, president & CEO of Prism Hotels, had a particularly sobering outlook for hotel owners facing loan maturities in the next year or two. “Things are improving, but the hotel economy won't recover enough by 2012 to generate sufficient proceeds to pay the loans that come due in that year.”
• Further exacerbating that situation, Scott Steilen, principal of Warnick + Co., said, “Hotels have scraped operations to the bone, but they can't be permanent cuts, especially as occupancies improve. Also, at some point, owners will face CapEx and PIP issues that will require further funding.”