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New construction off 40 percent; rates to rise
PHILADELPHIA -- After adding more than 100,000 new rooms annually for the past seven years -- and losing money for the past five years -- the U.S. hotel industry has finally made abrupt cuts in new construction. New hotel construction fell more than 40 percent in the first quarter of 1990 from the same period in 1989, according to Hotel Industry Focus, a quarterly publication of Laventhol & Horwath. Only 17,125 rooms were started, the fewest since the first quarter of 1979. The value of hotel building permits issued in March 1990 was down nearly 70 percent from March 1989. Slowing construction will help make the industry profitable again. Focus projects both higher room occupancy and increases in room rates that will outpace inflation. In 1992, room rates are projected to rise 5.4 percent -- up from the 3.8 percent increase expected this year. Increases will be most noticeable in depressed markets. Occupancy should rise to 67.2 percent by the end of 1992, compared to 63.6 percent in 1989. Credit for the slowdown goes -- not to the hotel companies, whose expansion plans equal or exceed last year's -- but to the nation's lenders, which won't finance the hoteliers' plans. "The hotel industry is feeling the credit crunch that is affecting all commercial real estate," said Saul F. Leonard, L&H's national partner for leisure time industries. "Many lenders have been hurt by overbuilding and over-optimism. they have a lot of bad loans and can't afford more." In addition, many hotel prices were artificially inflated -- some for their prestige value, others for anticipated long-term tax advantages. Future prices will be determined by a hotel's ability to turn a profit, said Thomas W. Lattin, L&H's national director for hospitality industry advisory services. "There will be less speculation," added Lattin. "Hotel managers who can fill beds and manage facilities profitably will be in demand." For now, the nation's S&Ls are making no loans for new hotels, he noted, while banks and credit companies are limiting themselves to refinancing and long-term clients. Insurance companies and foreign investors are both more conservative; insurers were previously major lenders on hotel projects, but have been pressed to cut back by their pension-fund clients. The killer: low rates Stiff competition and rates too low to cover development costs are major problems at many hotels. The industry's average daily rate increased only 3.6 percent in 1989, the second year in which rates increased less than the consumer price index. Rates were softer still at hotels built before 1987; they achieved only a 3.2 percent increase. Demand was up 5.6 percent in 1989, in part because hotel operators offered such incentives as weekend discounts to attract guests. Still, demand was not strong enough to compensate for the industry's excess supply.
Industry to benefit 'in long run' The industry's interests would best be served by an economy that is neither booming nor in recession. Recessions depress demand, explained Leonard, while a boom could trigger inflation. "Inflation would tempt the Federal Reserve to tighten the money supply," he said, "and that could produce a recession." Less hotel construction will probably mean more hotel renovation, said Lattin. "Hotel companies will behave more like homeowners," said Lattin. "For many, fixing up will make more financial sense than building new." Laventhol & Horwath is the national accounting and business consulting firm with services for the hospitality, real estate and health care industries. Headquartered in Philadelphia, it has 51 offices in major U.S. cities and is represented in 64 countries through its affiliation with Horwath International. --30-- Sample pickup... "After a Decade of Growth, Far Too Much Room at the Inn," The New York Times / Sunday, April 8, 1990 "The Ground Floor..." (column)," Barron's / June 11, 1990 "Hotel Construction Drops to Decade Low; Analysts Say Many Properties Will Close," Travel Agent / Oct. 8, 1990 "As Hotel Development Declines, Rates Will Rise," Successful Meetings / July 1990
 Mark
E. Dixon
757 Upper Gulph Road
Wayne, PA 19087-2022
USA
610-971-0649
dixon_mark@verizon.net
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LENDERS TURN OFF HOTEL INDUSTRY'S FINANCIAL SPIGOT