The last week has been a lot of dismal news to say the least. The massive job cuts that were well publicized last week jolted the stock market and the overall economy a lot. This week more companies are joining the fray including yesterday’s announcement of a big restructuring by Macy’s which is also cutting 7000 jobs.
On the hotel front, PKF made news last week estimating that RevPAR would fall by 9.8% this year including industry wide occupancy of 57.6%. That occupancy figure would be the lowest level ever tracked by Smith Travel Research. PwC this week predicted U.S. RevPAR will decline by 11.2% including an even lower occupancy rate 56.5%. Starwood kicked off the big hotel company earning season last week as exhibit A of the problem as they reported a shocking 13.2% decline in 4th qtr RevPAR.
My biggest concern in all of this is that the most seasoned brains that I know in the industry have always coached me to be aware when growth comes from rate rather than just occupancy. As one of them told me a couple of years back when warning me about deals, “That rate can go away quickly.”
The hotel industry is at risk of bleeding rate a lot in the next year. My money is on both PKF and PwC being too optimitic. I can forsee a double digit rate decline this year being as likely as not.
As Peter Yesawich indicated this month, their surveys are saying that people intend to travel but people are looking for real deals. I think it is not dissimilar to the throngs of people who came out before the holidays at my local Circuit City when they could buy things that were crazily discounted. A lot of people still have a lot of money, but they will only give it up in return for something that is a screaming bargin.
This leads me to PKF’s forecast that 20% of hotels will not generate enough cash flow to cover their mortgage interest this year. If there is even more ADR weakeness, that number can jump really quickly. The expectation is that hoteliers will dip into cash reserves to keep their loans current and/or try to negotiate some more leeway from their lenders. I think that is probably right that a lot of people will have a bad year in 2009 but muddle through even with negative cash flow.
This sets up the really big problem which has nothing to do with this year. What will the start of 2010 look like? A lot of hotels run very tight cash flow in the first quarter even in the best of times. If things are not turning around by the start of 2010, there will be some really tough decisions for people who have burned through a lot of cash reserves this year. Do they continue to throw money into their assets? How accomodating will lenders be a year from now?
A friend of mine told me years ago as we were evacuating New Orleans just before a hurricane that studies show that most people wait too long to take action when a crisis hits. By the time that people realize the gravity of the situation, it is often too late to take action that would have been easier to take if they had started earlier.
If you own a hotel, take even more drastic action than you think you need to by assuming the worst.
1. Managing costs even tighter than you think you need to
2. Going to lenders sooner rather than later and negotiating some type of loan forebearance even if it’s only interest only payments.
3. Building up cash well behind what you think you need
Many fortunes will be made by people who survive this period.