Industry Update
Opinion Article 1 September 2016

The Slowdown Goes On

Don’t believe the positive 2017 U.S. and global forecasts you’ve been reading. Rather, be prepared, for the worst is yet to come.

By Joel Ross , President at Citadel Realty Advisors

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As the weeks move on, occupancy continues to be negative as it has for most of the year. Recent numbers show a decline of 1.5%, and revenue per available room continues well below the levels projected by all the pundits at the Americas Lodging Investment Summit and the NYU International Hospitality Industry Investment Conference.


It is surely not the "Golden Age," nor the sweet spot for hotels espoused by many. It is about time everyone admitted the reality that the hotel industry peaked in 2015. Although RevPAR is up a little, inflation for items not including energy and food is up 2.2%, so real RevPAR is barely up at all. Just as important, net revenue after online travel agency fees and other commissions is down to 82.8% from 83.2%.

It is reported that outside of New York and Houston, U.S. hotels are doing well, but we need to look at what that is compared to. Is it compared to the period from 2009 to 2012? On an inflation-adjusted basis compared to 2007 they are doing a little better, but values are declining now; so again, on an inflation-adjusted basis it is not clear values are higher than they were in 2007. Transaction volume has declined materially, and lenders and investors are far more cautious and dubious of the future for hotels.

Some who wish to make things sound better than they really are will cite unemployment numbers, jobs numbers and conclude that all is great. Here's a reality check: While the headline numbers for unemployment sound good, the real unemployment number as used by economists is the U6 number, which is still above 9%. The participation rate is still near the 40-year low.

However, here is the real data point that matters: Personal income tax collections are flat, not up, despite job gains. That means that many of the new jobs are minimum-wage, or low-income and part-time. So less payroll and income tax is being collected. In short, workers are not getting ahead overall. Many jobs pay too little to really matter to hotels. Those people are not taking vacations, nor do they travel on business. Spending overall is not advancing much.

The other major factors are corporate profits, European economic weakness, China's economic weakness and the strength of the U.S. dollar.

Corporate profits have been declining for almost two years, especially when you look at real earnings, and not what CFOs call "adjusted" earnings. When earnings decline, travel declines. It is axiomatic. You need to understand there is nothing happening for the next six to nine months at the least, which is going to boost corporate earnings, and it is likely they will continue to decline right into 2017. Corporate transient and group travel is going to decline.

There is nothing good happening in Europe in the next year or longer, and it may get a lot worse. Brexit goes into full negotiation in January, and it will be ugly. The EU has many issues and their banks remain in serious problems. Few people in the EU or the U.K. can now afford to visit the U.S.

China continues to have major economic issues and serious debt problems. The government is going to have to bail out the banks at some point, and there is very possibly another devaluation sometime in the not far future. Chinese tourism is not going to be the driver you all hoped for.

The debt markets remain skeptical of hotels, and the regulators have pushed the lenders to be more conservative. Cap rates are up 20% or so from the low point last year. There are a lot of hotels with old CMBS loans coming due in the next year. Values will continue to decline, but not crash.

Add all of this to the wave of new builds and the continued expansion of Airbnb, and there are a lot of rooms coming online in the next 12-15 months in some markets. The data continues to ignore Airbnb, as do some in the industry, but that is simply stupid. Keep in mind the kid started just six years ago with an air mattress in his apartment, and now, a few years later, he is wealthier than Bill Marriott and runs the largest hotel company in the world.

Believing that this is not a threat to occupancy and rate is ignoring reality. The American Hotel & Lodging Association and others are still fighting the windmill, but they really need to start cooperating with Airbnb instead, or they will be run over. Local governments and cops have much better things to do than enforce 30-day-stay laws on individual citizens just trying to make an extra few bucks.

The election is having a material impact on economic activity already. We have the two most disgraceful candidates in history—a corrupt liar and an egomaniac. Neither will make a good president at a moment when we need a real leader to undo all of the serious damage Barack Obama has done.

As a result, uncertainty is the word everyone uses, so companies and investors feel this is the most uncertain time since 9/11, and they are mostly just sitting on the trillions that they might otherwise invest. This is not going to change with inauguration, and it may get worse. Asians and Europeans are afraid of what comes next, and they are unnerved by what Obama has done to make the world a far more dangerous place. 2017 will be a year when companies and investors most likely will stay in their bunkers until they can see with more clarity.

You can continue to believe the happy talk and drink the Kool-Aid dished out by the industry pundits and people with an agenda to make you feel good, or you can face reality and set your business plan accordingly. There is nobody anywhere in the U.S., or offshore that I speak to, who has any understanding of where the world or economy will be six or 12 months from now.

Anybody who says they project RevPAR, or much of anything else, to be whatever they say in 2017 is blowing the same rosy fog they blew at you at ALIS. It is meaningless. Chances are high it will be a worse year for net operating income this year and worse again in 2017. One terror attack on a large U.S. hotel, or a military incident in the South China Sea, or Syria, or the Strait of Hormuz, and all bets are off. All have a high degree of possibility of a black swan event. If you are not prepared for the black swans, you are living in la-la land.

Plan for higher labor costs, more regulation costs, less availability of debt or equity and lower values. Plan for a sudden incident to disrupt all your plans and then hope none of that happens, but if it does you will be ready and not damaged much. Survival is what matters now in case one of these things happens.

We now are in a world where the only certainty is uncertainty, and anything can happen at a moment's notice. Black swans swoop in when least expected. Be prepared.

This article first appeared in Hotel News Now and is reprinted with permission from the author.

Joel Ross

Joel Ross is principal of Citadel Realty Advisors, successor to Ross Properties, the investment banking and real estate financing firm he launched in 1981. A Wharton School graduate, Ross began his career on Wall Street as an investment banker in 1965. A pioneer in commercial mortgage-backed securities, Ross, along with Lexington Mortgage, and in conjunction with Nomura, effectively reopened Wall Street to the hotel industry.

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