A slew of respected hospitality industry commentators are predicting strong growth – anywhere from two to three years. HVS (Hospitality Valuation Services) founder, Steve Rushmore sees another three years of strong growth before supply additions begin to impact fundamentals while PriceWatershouseCoopers econometric models forecast robust growth through 2007. Nationwide demand for rooms is expected to exceed supply growth – net of rooms shuttered because of obsoloscence and, in some instances, for alternative uses. Lodging Econometrics, a research and consultancy firm from New Hampshire, has calculated that lodging demand will exceed supply growth through next year. Logically, the foregoing should result in higher room rates and presumably higher profits for owners and operators. And that indeed is the case when it comes to rates in many markets including New York. Profits too are up, if anemically so.
Lost in the flurry of strident headlines about ‘too few hotel rooms and high rates’ (which seems to have sparked a lemming like rush to acquire and develop property, particularly in the big metros) is a sense of this short if spectacular run. It was a mere two years ago, early 2004, that industry headlines had a decidedly dire overtone. A December 2003 Standard and Poor’s estimate had the industry leading other real-estate based industries like Office, Retail and Multifamily in specially serviced CMBS loans by a factor of 2 with a total of $1.3 billion. (Specially serviced loans is a euphemism for a troubled loan that was being structured). The preceding year even saw bankruptcies of large lodging companies like Lodgian. While few can predict the next downturn, absent a catastrophic event, the experts are largely right in anticipating a couple more years of growth.
However, now is the time for owners and operators to scrutinize the four biggies that affect profitablity – energy, real estate tax, insurance and labor. Arguably, of the four, the one that owners can influence the most is insurance. Insurance costs have soared since 2000 (with PKF consulting estimating the per room cost of insurance rising a whopping 250% since 1998 – when it was a mere $224). But like most averages, that disguises the unequal treatment accorded to big city hotels (which were perceived as likely targets for terrorists). The answer lies in conducting a comprehensive risk analysis to evaluate each hotel’s needs on a host of factors – location, partnership structure & deductibles. The hiring of a claims administrator goes a long way to reduce the frivolous claims that are a bane of the industry. Repeated training for employees on safety programs cannot hurt. Having a sterling claims record is not easy but what is known almost intuitively is that the fewer the claims the lower the premium for the next year.
The hotel industry never was and never will be a leading indicator; companies that make the most of today’s profitable climes have the best chance of withstanding the next downturn whether it is two, three or more years from now.