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Room at the Inn:
Demand from foreign travelers keeps U.S. hotels afloat

For the U.S. hospitality sector, this economic downturn is different from previous recessions and is not expected to have such a severe impact.


"Everyone seems to agree that we're in a recession, but it's different from the recessions in 1991-1992 and 2001-2002," says Greg O'Stean, executive vice president & managing director of hospitality for GE Real Estate's North America lending group. "During those recessions, hotels were empty. This time around we still have plenty of heads in beds."

Experts point to strong international demand and a relatively moderate development pipeline as the main reasons for the optimistic outlook. The continued weakness of the dollar is producing multiple beneficial effects on the U.S. hotel market and it may pull the sector through current recessionary pressures, says Michael Fishbin, Ernst & Young's U.S. director of hospitality & leisure.

The euro and the Canadian dollar have strengthened against the dollar in recent months. As of late May, the euro was worth US$1.57 and the Canadian dollar was worth US$1.007. As long as this exchange rate bonus exists for non-U.S. travelers, the benefits will be seen at hotels from ski resorts in Vail and Aspen to cruise ports such as San Diego, Seattle and Miami and traditional tourist and business destinations such as New York, Orlando and San Francisco, Fishbin says.

Come one, come all
While domestic demand has softened, foreign travelers are keeping U.S. hotels full and room rates up. In fact, the United States has welcomed a record numbers of global visitors over the past 18 months, according to the U.S. Department of Commerce. In 2007, a record 56.7 million international visitors traveled to the U.S., an increase of 11 percent over 2006. The 2007 numbers also surpassed the 2000 record year of 51.2 million visitors.

International visitors also spent a record-breaking $122.7 billion on travel to and tourism-related activities within the U.S. in 2007, an increase of nearly 14 percent over the previous record set in 2006, according to the Commerce Department. International travelers outspent U.S. travelers abroad by $17.8 billion in 2007, 113 percent over 2006.

So far this year, visitation to and spending in the U.S. from global visitors has continued to rise. In February 2008, 3.3 million international visitors traveled to the U.S., an increase of 15 percent over February 2007. For January and February combined, 13 percent more international visitors came to the United States when compared to the same period last year. International visitors spent a record $11.6 billion in the United States in February, a 26 percent increase from February 2007.

Fishbin says international tourists are looking to the U.S. as a prime vacation spot and are spending more money, often upgrading to higher-end and even luxury accommodations because their local currency now buys, in some cases, more than twice what it did just a few years ago.

Overseas arrivals (excluding Canada and Mexico) increased 11 percent in February 2008 over the same period in 2007. Visitation from Western Europe increased 17 percent in February 2008, according to the Commerce Department, with many travelers coming from Spain, Ireland and Sweden.

Visitation from Canada also was up 24 percent for February 2008, which makes sense considering the parity between the U.S. and Canadian dollars, which has increased Canadian spending power south of its border, Fishbin notes.

"If you look at gateway cities like New York and Los Angeles and markets where you have a lot of international business, the hotel markets are holding up quite well," O'Stean contends.

Short-lived softness
The strong international demand is preventing the bottom from dropping out of the market for hotel owners and operators. This year, they can expect to see a minimal decrease in occupancy rates and slower RevPAR growth, according to PKF Hospitality Research.

The Atlanta-based firm is forecasting an increase in demand of 0.9 percent this year, says Mark Woodworth, president of PKF Hospitality Research. While this pace of demand growth is roughly half of the long-term annual average, it still represents a net gain in accommodated room nights for the year.

And, although PFK Hospitality expects the recession will lead to real RevPAR declines in 21 U.S. markets, the firm says typical U.S. hotels will enjoy increases in both revenues and profits and is forecasting RevPAR growth of 3 percent for 2008, which is just slightly below historical annual averages.

Inflation is expected to drive up average daily room rates by 4.7 percent in 2008 - an amount that exceeds both the 2.7 percent projected pace of inflation for 2008 and the 3.5 percent long-term annual average change in room rates. At the same time, inflation will push operating expenses to increase 3.5 percent on average, resulting in an anemic 1.7 percent increase in unit-level profits for the year, Woodworth says.

Woodworth says that U.S. hotel owners and operators will struggle to grow their revenues and profits, but market conditions will not be as damaging as they were back in 1991 or 2001. In fact, he believes that the downswing should be relatively short-lived, with a turnaround expected in the first quarter 2009.

"So far, all we're seeing is that some companies are sending fewer people to annual sales conferences and incentive trips," O'Stean says.

Demand aside, the U.S. hotel market doesn't look too bad from a supply standpoint. Unlike previous economic downturns where the hotel markets were overbuilt, the hotel market today isn't flooded with new supply, O'Stean points out.

This year, PKF Hospitality estimates that 115,000 new hotel rooms will come online - enough to push the U.S. national average occupancy rate down from 63.2 percent in 2007 to 62.2 percent in 2008. But, the high cost of building materials and disciplined lending has curtailed the number of projects that have come out of the ground.

Further tightening within the lending community, combined with the continued price increases in building materials, will once again be a formidable obstacle for developers in 2008 and 2009. As a result, PKF Hospitality is projecting a lull in new rooms from 2010 through 2012.

"I don't expect to see a significant amount of new supply in the next couple of years, so there's every reason to expect that occupancy, room rates and hotel profits will recover strongly by 2010 and 2011," Woodworth says.

That means opportunistic hotel investors that were hoping to make huge returns by buying distressed assets might be disappointed. "When we looked at our portfolio of about $3 billion in hotels, we saw that owners were well covered in terms of cash-on-cash and debt service coverage even in a recessionary scenario," O'Stean says. "For the most part, owners are in a safe position and no one is under any pressure to sell."

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