It has been nearly one year since the September 11, 2001 terrorist attacks on New York City and Washington, D.C. Following the tragedy, the country began to regroup and formulate predictions on the overall economic and various industry sector performances in the year that would follow. In a report to be released later this month, Jones Lang LaSalle Hotels examines which post September 11 predictions came to fruition and which did not and, in doing do, discusses the status and outlook of the economy, hotel sector and capital markets.
TRUE OR FALSE: Will it be a “U” or “V” shaped economic recovery? Will operating performance ever again reach the lofty heights of 2000? Following the terrorist attacks, economists and industry pundits throughout the world put forth their best predictions as to what the economy (and the hotel markets) would be like come September 11, 2002. Following are some of the more popular theories contrasted against what has actually happened.
PREDICTION: Following the September 11 attacks we will experience a strong, sharp “V” shape economic recovery by mid-2002 rather than a “U` shaped recovery (weak 2002 and recovery in 2003).
FALSE: While Q1 2002 alluded to a “V” shaped recovery, the remainder of 2002 to-date has been marked by corporate accounting scandals and stock market volatility. In addition, the decline in GDP was revealed to have commenced earlier than originally forecast. As a result, GDP growth of 2.3% for full-year 2002 is expected, followed by 3.1% increase in 2003. Therefore, the reality is more likely a cross-between a “U” and “W” shaped recovery.
PREDICTION: The hotels sector is in a much stronger position to absorb the downturn than during the last recession.
TRUE: At the operating performance level, hotel profitability has been protected to a large extent by solid reserves and a continual improvement in operating ratios. On the capital markets level, there has not been the number of “fire sales” experienced during the last recession. Conservative lending, low interest rates and a more educated investment market have meant the mortgage default rate has remained at an historically low rate (according to the American Council of Life Insurers).
PREDICTION: Markets and segments most at risk:
- Large U.S. cities with high proportion of long haul and business travelers.
- Long-haul fly-over locations.
TRUE: - Large U.S. cities with high proportion of long haul and business travelers - these segments have not recovered at the same pace as domestic leisure demand and therefore hotels in these cities have continued to compete more aggressively on rate to secure business. The result is continued deep erosion of RevPAR, with cities such as San Francisco, Boston, New York and Chicago recording falls between 10 to 27 percent in RevPAR during ytd July 2002 - Long-haul fly-over locations - during the last quarter of 2001, Honolulu registered a 24 percent decline in RevPAR, a reflection of its exposure to the international market. This decline has softened to a decline of 13 percent during ytd July 2002, making it the fifth worst performer of the U.S. top 25 markets. The Caribbean experienced a fall of 18.8% over the last four months of 2001. However, winter increases in tourist arrivals were reported for all the major destinations in the region. Airport hotels - statistics prove that this segment has continued to be the poorest performer, with RevPAR falling by 20 percent in the last four months of 2001. YTD July 2002 results, while improved, still remain 10 percent below 2001 levels.
PREDICTION: Markets and segments most at risk: - Convention cities.
- New York and - Washington D.C.
TRUE: Convention cities - the immediate fallout on convention demand was significant during the latter part of 2002. The effect is still washing through the market, with convention and meetings, while not cancelled, are notably smaller in attendances. Cities that have particularly felt this impact include Chicago, Los Angeles and New York, all experiencing RevPAR declines in excess of 10 percent during ytd July 2002. New York and Washington D.C. - definitely hit hardest, recording record drops in RevPAR of between 27 and 37 percent during the last half of 2001. Performance still remains negative although the depth of the decline has been consistently improving.
PREDICTION: Hotel sectors to experience the least negative impact: - Drive-to hotel locations - Hotels located on feeder roads - Domestic leisure destination, due to fear of overseas travel and lack of exposure to inbound tourism.
TRUE: - Drive-to hotel locations - regional hotel markets have fared better in the 12 months since 9/11. For example, Houston and Norfolk-Virginia Beach posted RevPAR gains in 2001, with Norfolk building on this gain by increasing RevPAR by 12.4% in ytd July 2002. Philadelphia was the only other market (in the US 25 largest) to post a RevPAR gain during ytd July 2002. - Hotels located on feeder roads - the Highway hotel segment reported the softest decline in 2001 and ytd July 2002 RevPAR of 2.3% and 3.2%, respectively. - Domestic leisure destination - have indeed fared better than those cities exposed to international visitors and corporate demand, which both experienced sharper declines and are taking longer to recover.
Hotel sectors to experience the least negative impact:
- Hotels proximate to technology, communication suppliers and defense.
FALSE: Hotels proximate to communication suppliers and defense - there is little evidence to suggest markets catering to this demand (such as Washington DC, San Diego, Austin, Seattle and Boston) have enjoyed a market premium, although Washington DC has posted respectable performance in comparison to the top 25 US markets. San Francisco, the biggest city catering to the technology market, was never predicted to be sheltered from continuing declines.
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