REPORT FROM THE U.S.—Despite fears of irreversible carnage in the wake of the Lehman Brothers collapse and subsequent global economic malaise, the United States hotel industry has emerged five years later stronger and better positioned than ever, according to executives from various data companies.
Financial services firm Lehman Brothers filed for Chapter 11 bankruptcy protection from creditors on 15 September 2008, marking the largest such filing in U.S. history.
“Suggestions of a ‘new normal’ were overblown,” said Adam Sacks, founder and president of Tourism Economics, who pointed to record demand numbers throughout much of 2013.
During July, for instance, there were 108.5 million roomnights sold, the most of any month on record, according to data from STR, parent company of Hotel News Now. During the first seven months of the year, the industry has sold 652.8 million—also a record.
“What was equally surprising or shocking is the fact the bounce back was so quick,” said Jack Corgel, the Robert C. Baker Professor of Real Estate at Cornell University’s School of Hotel Administration.
“Generally in recoveries, hotels tend to lag. But in this case they led in recovery,” he added. “We had a fairly ‘V’-shape form on hotel performance numbers, specifically (revenue per available room), which certainly took some of the sting out of the shock because it didn’t last terribly long in the trough.”
Following a 0.6% year-over-year decrease in RevPAR during August 2008, the U.S. hotel industry posted 19 consecutive months of decreases, bottoming out at $41.14 during December 2009, according to STR.
It climbed 5.4% in 2010, before posting gains of 8.2% and 6.8% during 2011 and 2012, respectively.
Through July 2013, RevPAR was up 5.6% to $69.46.
From bad to worse
It was hard to imagine any recovery, let alone one so rapid, in the immediate wake of the Lehman collapse, sources said.
“We were all looking at each other and saying, ‘OK, how bad is this going to be?’” said Scott Berman, principal and industry leader, hospitality & leisure, at PricewaterhouseCoopers.
“We had a solid 18 months of hospitality hell,” he said.
“It led to the most severe year-over-year contraction in RevPAR that we’ve ever seen, at least going back to the 1930s,” said Mark Woodworth, president of PKF Hospitality Research.
STR pegged the RevPAR decline during 2010 at 16.8%.
Woodworth and Sacks were quick to point out the Lehman bankruptcy filing did not mark the beginning of recession.
“The U.S. was already in recession at the time,” Sacks said.
Lehman’s collapse simple made a bad economic situation worse, they said.
The R.W. Baird/STR Hotel Stock Index, which hovered near the 3,000 mark through much of 2007, registered 1,717.93 on 15 September 2008. By early 2009, it had fallen below 1,000. The index closed Friday at 2,834.01.
Exacerbating matters was the fallout from an ill-timed corporate retreat by the American International Group, which days earlier reaped the benefits from an $85-billion federal bailout. The much-publicized, $400,000-plus fete at the 5-star St. Regis Resort Monarch Beach in Dana Point, California, drew the ire of American taxpayers and politicians alike, many of whom began to publicly denounce high-end travel.
“Here we had Washington (D.C.)-induced stigma that it is really bad to have meetings in resorts, particularly high-end resorts,” Woodworth said. “None of us anticipated our president would be coming out saying things like, ‘Don’t go to Las Vegas.’ There were just series of events that contributed to this phenomenal downturn.”
Better for it
The gloom of recession was not without silver linings.
Lehman’s collapse and the subsequent halt in lending essentially froze new construction, setting the stage for unprecedented demand increases unfettered by new supply, said Jan Freitag, STR’s senior VP of strategic development.
“Less marginal projects are getting done and banks are asking for more equity, so only strong companies can build,” he said.
Woodworth shared a similar sentiment.
“There’s significantly greater discipline on the development part of the industry,” he said. “That’s a good thing. That provides a lot of tensile strength to the recovery. There’s a real firmness there. The fundamentals are aligned very, very nicely.”
Berman said the most laudable side effect was the way stakeholders from both sides of the table came together. Franchisors and franchisees, banks and borrowers—each relaxed expectations and found a way to live to see another day.
“The way 95% of the industry behaved was really admirable,” he said. “A lot of people, a lot of businesses were certainly impacted. Between the banks, the investment community, the brands, the management companies and the owners, it was really remarkable how the bulk of the industry was able to manage through this.”
The hotel industry is better because of it, sources said.
“We’ve had to be versatile and agile as we transition once again out of a distressed period to a renaissance period for the industry,” Berman said.
“Each one of these cycles that we live through have their own unique characteristics and attributes,” Woodworth said, “but I would say of the last the four I’ve gone through, I think the industry is better positioned today than it’s ever been coming out of a downturn.”