With the economy showing signs of slowing, New York-based Bear Searns & Co. Inc. is downgrading its forecast for the hotel industry and lowering investment ratings on six major hotel companies.
"There seems to be little doubt that the economy is slowing," says Jason Ader, senior managing director and lodging analyst at Bear Stearns. "And history has shown that when the economy suffers, so do hotels."
The Bear Stearns report notes that several trends point to a downturn in the economy. Consumer confidence, which in November hit its lowest level since October 1999, is not expected to improve.
Recent data also indicates that the unemployment rate will begin to rise from the historic low of 3.9% to as high as 4.5% in 2001.
As the expected slump makes its way through the economy, Bear Stearns predicts consumers will scale back their travel plans, which doesn't bode well for the hotel industry.
"Whether a true recession arrives or not is almost beside the point. Lodging companies and lodging stocks do not fare well in a recession," the report states. "We think that just the specter of a recession is likely to keep investor enthusiasm toward lodging stocks to a minimum."
In response to the slowing economy, Bear Stearns has downgraded its ratings on the following hotel companies: Bethesda, Md.-based Marriott International Inc., from buy to neutral; Beverly Hills, Calif.-based Hilton Hotels Corp., from buy to neutral; White Plains, N.Y.-based Starwood Hotels and Resorts Worldwide Inc., from buy to attractive; Washington, D.C.-based MeriStar Hospitality Corp., from buy to attractive; Fort Lauderdale, Fla.-based Extended Stay America Inc., from buy to attractive; and Toronto-based Four Seasons Hotels Inc., from attractive to neutral.
Despite the gloomy projections, the report does not predict a "cataclysmic downturn" in the hotel industry. The industry is better positioned than in the early 1990s, when a combination of decreased demand for hotel rooms, a recession and the Gulf War wreaked havoc on revenues per available room (RevPAR).
In particular, supply growth continues to decline, which should limit the potential downside, according to the report.
There is additional good news - hotel stocks have performed well this year. Lodging REIT stocks are up nearly 20% year-to-date, while large-company hotel stocks have risen by more than 25%. However, that strong performance is unlikely to continue, the report adds.
In January, Bear Stearns upgraded the lodging sector while cautioning investors that the call might be premature. Now, the company offers the following advice: "With our universe up nearly 30% since our upgrade and sentiment appearing to deteriorate by the day, we think it is prudent now to take money off the table."