COVER STORY, JUNE 2011
ROOMS TO GROW?
A look at the state of the hospitality market.
For hospitality industry professionals, it is difficult to say right now if the future looks bright or if the dark recessionary cloud behind us just makes everything else seem brighter in comparison. What is certain is that things are looking up after a tough few years, highlighted — or perhaps low lighted — by an especially grim 2009, and there are reasons for cautious optimism as the industry moves forward.
To a large extent, the current hospitality environment in the Midwest mirrors the national trend — a mood that can be described as positive but guarded. Recent surveys reveal that hotel owners and operators are more optimistic today about the future of the industry than at any time in the last several years. However, that optimism remains cautious. There are still a number of factors that are to be determined and questions that are still unanswered.
To appreciate the current state of the industry and get a feel for where we might be headed, we need to look a little closer at where the industry has been. We should review how the industry has evolved as it starts to emerge from the recession and examine some of the important trends and questions that are still facing the hospitality industry today.
Growth or “growth”?
The good news is the economy appears to have turned the corner, and hotel owners and operators everywhere are reporting slow but steady growth. In the first quarter of 2011, we are seeing year-over-year growth in almost every market, with some of the most sustained growth since the third quarter of 2008. At the low point of the recession, the overall industry numbers were off more than 30 percent from the pre-collapse highs, and there is reason to believe that we could get back as much as one third of that total slide by the end of 2011.
But we have to ask how much of the gains we see are real, and how much of it is just the market bouncing off the bottom? The general consensus among both economists and industry analysts is that the recovery is real, and is likely to be sustained, but the climb back will be long and relatively slow.
We are also seeing some supply-and-demand imbalance out there. The overall supply of rooms is up 9 percent in the last 5 years, despite the dramatic decline we have seen in expansions and new development.
Continuing from 2008, the hospitality industry is experiencing an ongoing lack of available credit. Therefore, with new construction still at a standstill or proceeding sluggishly across Midwestern markets, much of the activity is in redevelopment opportunities and adaptive reuse.
Throughout 2011, upgrades and renovations will also be key to getting back on track. With fewer opportunities for new builds and indications of travel picking up, hoteliers are better positioned to make improvements to existing properties to compete in their markets.
The market has also, perhaps understandably, experienced introspection and self-analysis in recent months, with revamping of management teams and reexamining of practices and priorities. As the economy starts to improve, hotel owners and operators that are not poised for the new economy are asking themselves “What can I change?” and “How can I improve?” In a way, the movement out of the recession and back toward a more positive trend line has removed the “weak market” excuse and prompted some operators to look in the mirror and consider looking for stronger management to maximize their position.
Where do we go from here?
There are still a lot of unwritten chapters in this recovery. The industry is well-positioned for growth going forward, so the cautious optimism we are seeing is justified. I suspect that there will be more lenders returning to the marketplace and a general loosening of the credit purse strings by about the third quarter of this year. Supply and demand are the biggest factors as always, and it looks like demand is continuing to improve, while at the same time we have not built up an oversupply. While 2011 is likely to continue to see modest gains, 2012 and 2013 look even more promising.
In the Midwest, Minneapolis, Indianapolis and Chicago have all made gains and continue to trend positive. The Midwest region is not seeing quite as strong of a demand curve as either coast, but the initial drop was not quite as bad either — part of a general truism that the Midwest does not dip as far and does not recover as fast.
Conventional wisdom has had a mixed track record during the past few years, and as things improve there is still great trepidation about short- and long-term trends. Anyone who paid more attention to the footnotes, disclaimers and “what ifs” over the past few years probably found themselves in a better position than those who stuck to the headlines and ran with the pack. As the industry continues to trend positively, those owners and operators that remain prudent will be best positioned for success in this new hospitality market. If there is one theme for the industry going forward, “cautious optimism” seems appropriate. We have turned the corner, and now just need to keep moving slowly and steadily in the right direction.
Robert Habeeb is president and COO of Rosemont, Illinois-based First Hospitality Group, Inc.
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