Hospitality Forecast: 2010 The light at the end of the tunnel is closer than you think

By Robert Rauch

So what is really happening in 2010? According to the U.S. Travel Association, business travel will be up 2.5 percent in 2010 with leisure travel up 1.9 percent. That leaves the group market — it would be nice if we could find someone who will project an increase in that market segment but we can’t. Naturally, each market and submarket in the U.S. will respond differently to the recovery.  However, the latest travelhorizons survey indicates that travel intentions of U.S. travelers is improving, which is certainly good news for strong markets like San Diego.
San Diego’s occupancy finished at 63.3 percent, down nearly 9 percent from 2008. Clearly, 2009 was not a banner year.  But the real problem was the drop in average rate to $124.45, down 12.7 percent.  The second half of 2009 saw Revenue per Available Room (REVPAR) drop nearly 15 percent, with a late year trend of 8 percent declines. This was a big improvement from the first half of 2009, when we saw 25 percent declines.
The good news: we are on the road to recovery, and 2010 should see a flattening out of occupancy and rate.
Sure, the recovery will be muted for many reasons. Corporate expense accounts, while loosening, are still tight, and there still remains the “AIG effect” putting a damper on group business. This pushes hoteliers to rely on leisure business, which is now being dominated by the Online Travel Agents (OTAs), and this may have a negative impact on rates in the near term.  Furthermore, the U.S. budget deficit is real at $1.35T (yes “T” for trillion), and a likely commercial real estate meltdown has not yet come to fruition in the lodging sector, and unemployment is still at unacceptable levels.
But there is some good news. The recession has ended, and we are truly seeing signs of a recovery. Interest rates remain low, and the federal government seldom moves rates in an election year (yes, 2010 is a mid-term election year). Moreover, vacations are still a high priority for U.S. residents, who will be spending more freely when the recovery proves to be real to them. We’ll start to see the opening of the pocketbooks during the summer of 2010, or in about six months, despite a likely upward movement in gas prices.
What should we as hoteliers do? It would be a violation of anti-trust laws if I called my fellow hoteliers on the phone and said, “Hey, what the heck are you doing with your rates?” However, telling everyone I know that the recession has ended, occupancy will come back, and it is time to use caution when dropping rates with reckless abandon is perfectly reasonable and legal. So, I hereby pronounce the end of the recession and the beginning of the “road to recovery.” The road will have a few potholes in the early stretches, but will smooth out later in 2010, thus paving way for a nice 2011.
Peter Yesawich recently told a San Diego Convention & Visitors Bureau crowd to “Look through the windshield, not the rearview mirror.” To that I say, “Right on, Peter!”  All indicators point up. Airport arrivals are moving in the right direction; President Obama just signed into law a bill that will increase international travel; hotel demand is up; supply is leveling off, and it is time to think positively.
Consumer spending should follow the recent improvements in consumer expectations. Air and auto travel are both up, and the supply/demand balance is going positive. New supply in San Diego is expected to be less than 1 percent in 2010 and 2011.  If demand grows by the average of the last 30 years, occupancy will move up in 2010.  Following a two-year recession, there is unusually high “pent-up demand.”

If you are asking if we will see an increase in profits, the answer is not yet.  Costs have continued to increase, and average rates will remain flat until somebody believes that we have truly recovered, and debt levels remain above the valuation of today’s hotel properties.  Therefore, a reasonable objective for 2010 might be to “break even until rates grow.”
Hotel values will remain depressed, because those who can’t hold on to their assets will let them go at prices below a normal market. Loan to value percentages are at an all-time low, while net income remains dangerously low, and debt markets are elusive. Hang on if you can — there is light at the end of the tunnel. The tunnel only appears to be dark and endless, which is not a pretty picture if your interest payments put knots in your stomach.
Robert Rauch is a local hotelier who sits on the board of the San Diego Tourism Marketing District and has recently been chairman of the San Diego North Convention & Visitors Bureau among other local, regional and national organizations. He is the founder and publisher of hotelguru.com and teaches hospitality entrepreneurship at the college level.