Market Meltdown Rattles Lodging Sector

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Today would be a bad day to visit your local lender to ask for a loan. The entire nation remains spooked following yesterday's dramatic Wall Street sell-off in the wake of Standard & Poor's downgrading of the U.S. credit rating. Lodging stocks, and lodging REITs in particular, took it on the chin yesterday. Felcor Lodging Trust dropped 72 cents, or 18.5%. Ashford Hospitality Trust fell 10.9% and Sunstone Hotel Investors 8.5%.

Hotel brand companies fared a little better but not much. Wyndham was down 8.2%, Hyatt slipped 2.8%, Starwood declined by 5.2% and sector bellwether Marriott tumbled 5.8%. Investors and analysts typically run from the leisure business when the economy looks gloomy. The line of thinking goes this way: A bad economy leads to less business travel and fewer meetings, while pessimistic economic news discourages leisure travel.

While that line of thinking may seem rational, it doesn't necessarily stand the test of time. The Great Recession we just endured, and may get to endure again if a double-dip emerges, was less harsh on the hotel business than on many other industries. Business travel fell initially but rebounded quickly, and leisure travel maintained a fairly steady pace even during the worst of times. Yesterday held some good news for the hotel business as the price of crude oil dipped under $80 a barrel. Oil prices, and more specifically retail gasoline prices, are a prime driver of leisure business. Perhaps irrationally, even a 10- or 20-cent rise in gas prices will provoke many leisure travelers, seniors in particular, to revamp or even cancel their travel plans. Lowering of gas prices has the opposite effect.

And while the luxury segment of the lodging business took a nosedive at the onset of the recession, it has bounced back the strongest. As the New York Times reported last week, sales of all luxury goods and services are nearly back to pre-recession levels.

Still, yesterday's market tumble and whatever happens today is a reason to worry. If the economy tanks for an extended period, the lodging industry is bound to suffer and financing for acquisitions or development will dry up. However, when the economy shakes this malaise (and we all must believe it will) and inflation rates rise (as we all know they eventually will), hotels will again be a favored sector among real estate investors due to its unique ability to reprice its product daily.

Today, I suspect we'll all have our eye on the Dow and will be holding our collective breath, hoping for a calming of the market. My hunch is it will, perhaps not today but sometime soon.

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