At a time when we are finally beginning to stop referencing the ongoing recovery and discussing hotel development activity, we might already be getting ready to experience a market peak.
Although the recovery has been relatively slow, the hotel industry has seen a fairly speedy return to supply-demand equilibrium. While some aspects of the economy remain uncertain, and the state of the industry’s recovery is still somewhat tentative (even fragile), we just went through the busiest July and August in the history of the hotel business. That is no small feat. That performance, combined with some optimistic forecasts from industry analysts and observers, has helped to ignite a new round of supply additions. Some of the professionals who track revenue-per-available-room growth closely are suggesting we might see as high as 7% RevPAR growth next year.
While this might be good news in the near term, it could be something quite different in the not-too-distant future. Because those of us who follow cycles know these are precisely the ingredients needed to prompt a downturn: a run-up in RevPAR and an explosion of interest in developing new hotels.
What might this mean for the industry? In all likelihood, hotels coming out of the ground today are probably still on the right side of the cycle. But six months from now, if you are planning to develop a hotel, you are more likely to miss the peak.
Cyclical doubt
Many people are still deeply concerned about the state of the economy, observing lingering weakness in more than a few regional and local markets. While not all markets have recovered, most have moved in the right direction.
There is a general sense that, because the last recession lasted for so long, we are likely to see a period of positive growth that is equal in length before any kind of correction, but I am not sure this is supported by the facts. There are indications things could take a turn south a little quicker than some have anticipated, and, while I still think 2014 will be a good year for most, sometime in 2015 we will start to see signs of the market turning again.
On some level, we all understand the cyclical nature of the economy, particularly in the hotel industry. This is an industry that is particularly—perhaps even uniquely—sensitive to the ebbs and flow of financial performance and consumer sentiment/behavior, and anyone who has spent much time in the industry recognizes those familiar patterns repeat. In some ways, the lifecycle of the last peak, in 2007-2008, might subsequently provide us with some hints of what is in store in the next year or two.
By the third quarter of 2008, we had already been seeing some slow deterioration of the markets. I suspect we will probably see something similar beginning in 2015. The real question is: Will we hit the wall and crash like we did toward the end of 2008? “Crash” is no overstatement; we saw a 30% to 40% decrease in RevPAR in a single month. That is a true crash.
The new normal?
People tend to remember the depths of a recession, but almost every drop-off is preceded by a period of pre-tipping-point erosion.
In 2008, for example, when the slowdown in development activity first became evident, it was not necessarily obvious we were on the glide path to a deep and punishing period of sustained recession. If we start to see that erosion again in early 2015, that might be sooner than some experts and analysts expect. I am beginning to wonder if this is our new normal: a modest recovery quickly accelerating back toward a slowdown/correction.
The economy used to work in more traditional up and down cycles, much like the stock market. If you were honest with yourself and studied the market, you would have a good idea of when to buy and when to sell, simply because the patterns were fairly vivid. If this is the new normal, there is little doubt government has to take some of the blame. Because it changed the rules so significantly by intervening in the private marketplace, government has contributed to a new dynamic that it is no longer based on a predictable ebb and flow. These days it is a little more like carting a road of bricks; the uphill stretches and the downhill stretches might feel quite a bit different.
However, there is reason to believe the coming slowdown will not be as much of a “crash” as just a general decline. The good news is access to debt is still by and large conservative. This is noticeably unlike 2007, when debt was so easy and so available that we witnessed even the most ridiculous and unlikely projects get financed. That is not what is happening now, and we are therefore unlikely to see the same steep drop we saw in 2008.
But there is little down that a downturn is coming. We are seeing new projects announced almost every day, and the market is not yet so strong that it is going to be able to sustain a huge increase in supply for too long. With a robust increase in supply, we might see some significant dispositions in the next 12 months. I doubt very much that I am the only one who feels this way about 2014-2015, and I suspect many of those who agree with this outlook will be looking to sell.
Some of this is instinct, and some of it is me looking into my crystal ball. But much of it is based on hard-earned lessons learned from past ups and downs in the markets and in the industry. Anyone who has been in this industry long recognizes that peaks and valleys are an integral part of the professional terrain. They are not the exception; they are the rule. And, in the context of new legislative and financial realities, those peaks and valleys might be coming a little more frequently than we are used to.
Robert Habeeb is president and COO of First Hospitality Group, Inc., is a national, experienced, and established hospitality management, and development company serving the investment and real estate industries. Since 1985, FHG has been an award-winning pioneer in the hospitality industry. FHG has successfully developed, marketed and managed over 16 brands and 50 properties throughout the Midwest. Visit www.fhginc.com.
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