This year doesn’t look suite for hotels
On New Year’s Eve in downtown Los Angeles, hotel lobbies were crowded with revelers and guests, many of whom were planning to attend the Rose Parade or Rose Bowl football game in Pasadena the next day.
But the holiday crowds concealed the uncomfortable fact that the incoming year would probably not be a very good one for the hospitality business.
A single flight of stairs above the busy lobby at the Westin Bonaventure on Figueroa Street, an arcade of shops was almost entirely devoid of customers, and the “sale” signs posted in the windows looked worn with age.
Visits from splurging tourists have diminished, said Donald Kim, who has operated a boutique in the hotel for more than three decades. He still stocks pricey gifts with gold-plated brands such as Dior and Givenchy, but he has added low-cost knickknacks meant to appeal to the conventioneers who now make up the bulk of his customers.
“Those people only buy souvenirs such as T-shirts,” he said. “Not handbags.”
Fortunes of the once-highflying hotel industry fell hard at the end of 2008 and the prospects for 2009 look grim as anxious Americans cut travel spending and leave plenty of room at the inn.
Hotel operators have seen room reservations fall drastically as business travelers and vacationers cut down on trips. In 2009, U.S. hotels will suffer one of the greatest annual declines in occupancy and revenue in history, according to analysts.
That’s terrible news for those in the hospitality industry, and the stocks of publicly traded hotel companies are taking a beating as investors flee.
In their suffering, however, many hotels will give travelers a break in the months ahead by lowering prices or offering incentives such as free meals in hopes of enticing more business.
“We just get creative,” said Mehdi Eftekari, general manager of the Four Seasons Hotel in Los Angeles, where he says occupancy is down slightly. Incentive packages might include a free breakfast, car rental or spa treatment with room booking. Perhaps they will offer paying guests their third night free.
“We know that people have scaled back,” he said. “The first-class traveler is traveling coach. The suite buyer is scaling back to a standard room.”
The Four Seasons doesn’t plan to lower room rates, but many others are. Analysts at PKF Hospitality Research predict net operating income will be down 14% at U.S. hotels in 2009, driven in part by room rate reductions.
In West Hollywood, the upscale Sunset Marquis Hotel and Villas cut some room prices by more than half during the holidays, offering two-bedroom villas that usually go for $2,400 a night for $700. Promotional rates for this year reduce basic junior suites from $390 a night to $305.
The lean times, which are expected to last into 2010, follow a nearly decade-long boom starting in the late 1990s. Hotel business dipped sharply in the recession of 2001 and 2002, especially in the months after the Sept. 11 terrorist attacks. But after that interruption, the years that followed were good ones for hoteliers as travelers resumed their free-spending ways.
Hotels sold at ever-increasing prices and properties were built all over the country to meet growing demand. Orange County saw the creation of fancy new inns such as the Resort at Pelican Hill in Newport Beach, St. Regis Monarch Beach Resort in Dana Point and the Hyatt Regency Huntington Beach Resort & Spa.
Several older hotels in Los Angeles County received multimillion-dollar upgrades and returned with higher room rates and often with new names. Among those reborn in recent years was the Palomar in Westwood, formerly a Doubletree; the Hotel Angeleno in Brentwood, formerly a Holiday Inn; and the London Hotel in West Hollywood, formerly the Bel Age Hotel.
Those hotels were planned in a flush economic era that now stands in stark contrast to today’s new “normal” of frozen credit, home foreclosures and horror on Wall Street.
“This is a bad time in part because it is coming off of a great time,” said Bruce Baltin, senior vice president of PKF Consulting Corp., which monitors the hotel industry. “The years 2005 and 2006 were all-time highlights for Southern California.”
Much of 2007 was also great, followed by a gradual loss of momentum into 2008 as occupancy dwindled. Then came the credit market meltdown last summer and the ensuing economic crash. Business and leisure travelers quickly cut back.
“September was definitely a point of departure, when hotel revenues around the country began a free fall,” said Los Angeles attorney Jim Butler, a hotel specialist and industry blogger. “Since Labor Day, business has been falling off a cliff.”
Indeed, U.S. hotels have entered one of the deepest and longest recessions in the history of the country’s lodging industry, according to a December report by PKF Hospitality Research. The report predicts a nearly 8% drop this year in revenue per available room, a key industry measurement of performance typically calculated by multiplying a hotel’s average daily room rate by its occupancy rate.
That would be the fifth-largest drop in revenue per available room since 1930. The largest recent drop was in 2001, when the measurement slipped 10.3%.
Most of the reasons revenue is slipping are obvious. Corporations under financial siege are cutting back on travel expenses when they can, reducing the number of trips their employees take and often putting them in cheaper hotels when they do travel. Companies are also axing group events such as out-of-town sales meetings and seminars that are usually a reliable source of income for hotels.
This is in part to cut costs but also to avoid looking wasteful or frivolous, said hotel investment banker Donald Wise of Johnson Capital. When word got out that AIG Inc. senior executives had attended a $440,000 company retreat in September at the St. Regis Monarch Beach, they were pummeled by critics because the event was days after AIG had received an $85-billion bailout from taxpayers.
The public outrage directed at AIG caught the attention of other business leaders, many of whom had grown accustomed to fine travel experiences at company expense, Wise said.
“Corporate America somehow woke up to the fact they have shareholders,” he said. “Suddenly there was an awareness that in bad times you shouldn’t be spending money like that.”
Even five-star hotels are feeling the sting, Wise said. “The Four Seasons, Ritz-Carltons and St. Regises of the world have had tremendous cancellations.”
As their incomes fall, hotel owners will respond by laying off staff and cutting other costs that might include some guest services and amenities, PKF analysts said. Empty rooms help reduce operating expenses because they don’t need daily services, but there is also a limit to how many dark rooms hotels can financially tolerate before the lack of income becomes crushing.
During the first three quarters of 2008, hotels tried to hold the line on room prices, analysts said. Then many got nervous and started reducing rates, even though it might not be in their best long-term interests. Studies have shown that discounting rooms just to get them occupied doesn’t necessarily improve the bottom line after expenses are figured in, and raising rates again later can put off return customers.
“By and large, hoteliers have given in and are trying to compete on rate, which will create a downward rate spiral,” attorney Butler said. “That will mean significant pain for a lot of people in the hotel industry.”
Many hotels traded hands during the boom years and, like many homes, are no longer worth as much as their outstanding mortgage debt. Some hotels may be worth half of what their owners paid two years ago.
“It’s scary,” Butler said. “Some owners will lose their hotels.”
There will be bankruptcies, distressed property sales and loan renegotiations with banks, he said, but not as many as there were in the recession of the early 1990s.
The Bonaventure’s top executive, Peter Zen, acknowledged that tourist travel had slipped but said he expected conventions booked long ago to be held this year, even if not as many people show up as originally planned. Bread-and-butter business travel, however, is “way down,” he said.
“You used to have people traveling to do deals. Now there are no deals to be done,” he said. “It’s going to be a tough year.”