Originally published in AAHOA Lodging Business, March 2009

Northeast regional Hotel Update

Highlighting hospitality trends around the United States.
By Coleman Wood

The hospitality sector is quick to feel the effects of a recession. Business travelers and vacationers travel less, which means that hotels see more vacancies and a bigger hit on their bottom lines. After seeing market fundamentals decline rapidly at the end of 2008, what does 2009 hold? Lodging Operator spoke with experts in the Northeast hospitality sector to find out.

According to Reed Woodworth, vice president of PKF Consulting, a consulting and real estate firm that specializes in the hospitality sector, the first two-thirds of 2008 looked good for Boston and many other Northeast markets. But after October, everything turned around “significantly and catastrophically,” as he puts it. And so far, the beginning of 2009 is not showing much improvement.

“I think, locally, the numbers that we’re seeing show that the first half of the year is certainly going to be a struggle,” Woodworth says. “I see some optimism later in the year for lessening the decline of 2008, but overall, by the end of the year, RevPAR is still going to be down on the order of 6.5 percent [in Boston].”

One thing Boston does have going for it right now is its strong healthcare and education industries, which typically are lagging indicators during a downturn. In submarkets such as Cambridge, which has a strong presence in both, it was not until well into November that the market started to turn. Recession or not, people need both healthcare and education, which should help the city some. Places where hospitality makes up a bigger piece of the economy, such as New York City, are not as lucky.

“We’re already seeing the dramatic rate turnaround in New York City, as hotels scramble to try to capture what customers are still available there,” Woodworth says. “New York City, relative to where it’s been in the past couple of years, is having a significant downturn, as I see it. The bigger they are, in terms of the rates they’ve been able to achieve the past few years, the harder they’re falling right now in what they’re having to do keep some semblance of business.”

RevPAR comparisons from 2006-2009 for major Northeast markets. (data from PKF Hospitality Research and Smith Travel Research)

Tom Hamm, national director of hospitality for Sperry Van Ness, adds, “New York had long prospered due largely to last two years’ weak dollar, which brought foreign tourists in droves and allowed New York hotels to maximize their room rates. The average rate for the city dropped $36 from $233 to $197, but more telling is occupancy, which fell from 72 percent to 58 percent.”

The struggles that New York City is facing may not last, though. Daniel Lesser, a senior managing director with CB Richard Ellis who specializes in hospitality, thinks that the city is poised for good long-term growth.

“The good news is that New York continues to be a very vibrant city. It’s really the capital of the world. Long term, I truly believe that New York City is under-supplied,” Lesser says, adding that the city’s economy has become much more diversified, which can attract a wider variety of people in need of hotels.

While times right now may be bad, many in the Northeast are thankful they are located here, as opposed to other parts of the country.

“It differs from market to market, but the Northeast, in general, is going to weather the storm a little better than some of the other markets in the country,” Woodworth says, though he adds that markets such as New York City would be hard-pressed to agree with that statement while the chips are down.

Another positive aspect is that deals for hotels are still getting done, albeit at a smaller price point. With the institutional lenders gone, small deals that can be financed by local and regional banks have taken the place of mega-deals.

“Anything above $10 million is almost non-existent,” says Jim O’Connell, principal of O’Connell Hospitality Group.

Hamm notes that buyers of all sizes have lined up the financing and are looking for bargains, which are showing up in the market at a fraction of replacement cost.  According to data from Real Capital Analytics, six full-service hotels traded recently in Boston for an average price of only $56,825 per room. Eight limited-service hotels sold for an average of $119,531 per room. Looking at the Northeast’s tertiary markets, 12 hotels sold for an average price of $93,219 per room. But Lesser warns against buyers that are looking to snatch up a hotel just because it is on the market.

“Just because something is for sale does not mean it’s a fire sale,” Lesser says. “There is this impression out there — and I think, for the most part, it’s true — of why would anyone sell today if they did not have to? But there are also different degrees of ‘having to.’”

Looking at the current downturn, Woodworth says that one thing he has noticed is that there is still a heavy resistance from people to give up their vacations. The nature of those vacations is changing, though. When times were good, New Englanders flew out West or to the Caribbean for vacation. Now, they are more likely to drive to closer vacation destinations, such as New Hampshire or Maine. This is good news for these secondary and tertiary markets, which are still struggling to make it back to the levels seen before the Dot Com bust.

“In general, they’re performing poorly…Until we see some commercial demand come back to the suburbs, the hotels will still continue to suffer,” O’ Connell says.

Looking toward the rest of the year, more distressed assets will come to market. O’Connell notes that as operating revenue deteriorates, more owners will find themselves in trouble. Hamm notes that while Real Capital Analytics identified 35 troubled assets in the region in a recent study, it sees 763 additional distressed assets coming through the pipeline. But he believes that the current trials of the market will pay off for those that can stand the test.

“There is no question that buyers with strong balance sheets who have or can raise cash — and have staying power to weather the recession — will see what is rapidly becoming the best buyer’s market most of us will have seen in our lifetimes,” Hamm says. “It is just a matter of time for the economic cycle to reverse. In my opinion, buyers who are able to get in soon will be positioned to make the most extraordinary gains ever.”

O’Connell tempers his optimism a little more, cautioning those in the industry of another trouble to come.

“We will probably look back at 2009 as the bottom, because I think in 2010 the financial institutions and Wall Street will have gotten their act together, and have been able to sell the debt,” O’Connell says. “So, we’ll start to be able to make a market again in 2010, but I think this real estate problem is going to be with us into 2011 and 2012 because of the massive number of debt — I think there is $300 billion worth of debt coming due in 2011 and $400 billion coming due in 2012.”

To contribute an article to Lodging Operator:
email lodging@francepublications.com.

© 2009 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For more information on reprints of this article contact Barbara Sherer at (630)554-6054.