Ernst & Young: Hospitality Sector Recovery Likely to Continue in 2012 Despite Ongoing Global Economic Uncertainty
__Hospitality market fundamentals look set to continue the recovery which started in 2011 in spite of continuing uncertainty and the prospect of further upheaval in the global and regional economies according to Ernst & Young's latest Global Hospitality Insights report published today.
Despite the uncertain global economic environment, hospitality indicators continue to appear positive. "The conventional wisdom suggests that key fundamentals should be on the wane, but that has not happened yet and, due to many factors, we don't believe it will occur in 2012," said Michael Fishbin, Ernst & Young's leader of Global Hospitality Services. Nevertheless, Fishbin suggests hotel operators and investors in the sector need to stay focused and not have a false sense of security by the overall numbers.
"The situation for the hotel industry is markedly different from market to market and global operators need to be on their toes and ready to react to rapidly changing conditions," he added.
Fishbin contrasted hospitality markets in developed economies, such as the US, with some developing economies such as China and Brazil, where construction has been very active. In the US, currently the largest hotel market in the world, the construction of new hotels has historically averaged around two percent per year but in recent years, and for the foreseeable future, is projected to be less than one percent per year. "Even with the uncertain economic outlook, hotel supply is not going to outpace demand any time soon, giving fundamentals such as room rates and overall occupancy a chance to further recover," Fishbin said.
Among emerging economies, Brazil could fare the best over the next decade in part by the impact of two mega events -- the FIFA Soccer World Cup and the Summer Olympics -- scheduled to take place there in 2014 and 2016, respectively. These events will attract millions of travelers to the country and while hotel construction has been increasing in preparation for both events, officials are taking a pragmatic approach in order to avoid overbuilding.
Fishbin concludes that while the bias among hotel companies will be to continue to grow in 2012, that growth should not come without a fair amount of checking back in the rear view mirror. "This isn't a time for hotel operators to abandon the principles that allowed them to navigate through the recent economic downturn," he says. Many companies are still sitting on piles of cash waiting for an opportunity to transact, says Fishbin. "Companies should take advantage of this breathing room to reassess and examine their capital agendas to make sure they are using cash wisely and efficiently as well as preparing for future growth," he says.
By Suzette Parmley, The Philadelphia InquirerMcClatchy-Tribune Regional News
July 17, 2011--Debra Cook of Denton, Texas, felt she scored a coup after booking her stay at the four-star Loews Philadelphia Hotel for $100 a night Sunday through Thursday last week, on Priceline.com.
"You can't beat that rate," said the 11th-grade English teacher, who was here for a five-day conference at the National Constitution Center.
But Cook's room savings are costing city hoteliers. While downtown hotels are benefiting from new business brought by the recently expanded Pennsylvania Convention Center, they are charging rates far below 2007 levels because of the sputtering economy and intense competition from other major U.S. cities, primarily New York, Washington and Boston.
"Hotels in the Philadelphia region have not recovered from the recession and are not projected to recover until 2013," said James Gratton, president of the 85-member Greater Philadelphia Hotel Association and general manager of the Courtyard by Marriott Philadelphia Downtown.
While hotel rates are slowly come back, he said, they aren't projected to return to 2007 and 2008 levels for at least another two years.
New business created by the Convention Center expansion still leaves rooms to fill.
"If the average convention lasts four days, and we host 20 citywide conventions a year (those requiring 2,000 or more rooms on peak nights), there are still 285 nights a year . . . the hotels will have to fill," Gratton said. "Currently, we are projecting 16 conventions in [both] 2012 and 2013."
Last year's revenue per available room, or RevPar -- the metric used by hotels to measure profitability -- was $104, the same as in 2004 and well below 2007's $122.46.
As of May 30, Center City's year-to-date average daily rate (ADR) was $158.21, compared to Boston's ADR of $179.71, and Washington's $215.59.
Several city hoteliers interviewed contend that if the lower ADR persists, it could cut into profits and hinder the ability of newer hotels to finance their mortgages.
"When you think about operating costs such as commodities and labor, they've all gone up while ADR has gone down," said Nick Gregory, director of operations for Kimpton Hotels Philadelphia and general manager of the 230-room Palomar at 117 S. 17th St. "With occupancy flat, you lose the ability to make a profit."
The result, added Gregory, is "ownership groups come down hard on management to lower amenities to keep costs low. If labor is the number-one expense. . . you have to cut labor."
That, in turn, can diminish the customer's experience, said Bill Fitzgerald, general manager of the 432-room DoubleTree Hotel Philadelphia. "We are having to do more with less."
There's another issue, a serious one for Philadelphia and the expanded Convention Center: Evan Evans, general manager of Le Meridien, which sits across from City Hall, said as profits are squeezed, capital improvement projects such as expansions or renovations are put on hold.
The lower ADR threatens several hotel projects that were intended to support the Convention Center's expansion, which debuted March 4. Four years ago, there were more than 20 such projects in the pipeline. The 268-room Monaco by Kimpton in Old City and the 136-unit Homewood Suites in University City are the only two hotels set to open next year.
"Lenders use ADR and RevPar to determine the health of our industry and make credit decisions," Evans said. "The city needs to add an additional 1,600 guest rooms to support the expansion of the Convention Center, but investors are waiting for ADR to return."
Philadelphia's chief rivals -- New York, Boston and Washington -- are commanding higher rates even though they have more rooms to sell.
With over 66,500 rooms in Manhattan, and as the nation's top tourism draw, New York holds top ranking as a given. Much of Washington's hotel clientele is government-related, which explains its No. 2 spot in ADR.
But Boston's higher room rate than Philadelphia's is puzzling, since both cities have similar historical attractions and walkability. Boston also has far more rooms to sell, 18,189, against 11,160 here.
C. Patrick Scholes, senior gaming and lodging analyst at FBR Capital Markets, said Boston was more of a financial capital and home to several mutual funds and hedge funds.
"This corporate travel segment tends to pay more for rooms," he said. "Whereas in a more leisure-tourism market like Philly, the rates that you can command for that group are less."
Having a smaller footprint also works to Boston's advantage.
"Downtown Boston is a little more congested and harder to build new properties," said Scholes. "It's harder to put up new supply in there and part of why it can command a higher rate."
Boston also has a strong summer convention market and the venue to support it, said Larry Meehan, vice president of tourism sales for the Greater Boston Convention and Tourism Bureau. The much bigger Boston Convention and Exhibition Center opened in 2004, and has a seven-year head start on Philadelphia's expanded center.
There is a silver lining for Philadelphia. The limited supply of new hotels will ultimately boost rates as the larger Convention Center draws customer traffic, say analysts and hoteliers.
For now, Angie and David Hein, of Cromwell, Conn., are taking advantage. The couple stayed one night in a $349-a-night suite with a complimentary upgrade at the Palomar last week after taking in the city's sights.
"Price, location, amenities. We got all three," said Angie Hein, 63, as she checked out last Thursday. Contact staff writer Suzette Parmley at 215-854-2594 or email@example.com.
To see more of The Philadelphia Inquirer, or to subscribe to the newspaper, go to http://www.philly.com/inquirer.
Copyright (c) 2011, The Philadelphia Inquirer
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