Lodging Sector: Foreign Investing to Help Offset Slower Growth

The hotel industry is very likely to see declining fundamentals, but the influx of institutional investors to the sector and strong inbound international travel to the U.S. are two reasons the slowdown is unlikely to be as severe as the last industry slump, concluded a panel held at the Americas Lodging and Investment Summit that was held on Wednesday in Los Angeles. John Arabia, panelist on “The Equity Outlook- A Focus on REITS,” commented that he has distilled opinion from a number of leading economists who have recently weighed in on the subject, and said the U.S. economy is projected to grow at a meager 1% for 2008. But he sees signficant differences between the environments of 2000 to 2003, the last hotel industry recession, and today. After the terrorist attacks of Sept. 11, international inbound travel declined to the U.S. declined in a massive way, while international travel to the U.S. is now strong, helped greatly by the weak dollar, he said. Also, the lodging sector’s last slowdown was fueled not only by a weakened economy, but also by the large supply of hotel rooms that had just come online. “That supply growth is double what we are seeing today,” Arabia said.Panel moderator Robert Koger, president of Molinaro Koger, said generally, he has seen cap rates on hotel assets rise from 50 to 150 basis points, but that varies greatly by market and the type of asset. “If you sold the St. Regis or Four Seasons in New York today, that would be at the same cap rate as last summer,” Koger said. Indeed, the entrance of deep pocketed, large institutional investors into the hotel industry in recent years should mean a wave of panic selling is highly unlikely. “I don’t see Blackstone saying ‘We have to clean out all our assets, and sell them at a 10 or 11 cap.’ They don’t need to do that,” Koger said. One open question that remains is where the CMBS market is presently, said Ken Cruse, CFO of Sunstone Hotel Investors, Inc. “We’re going to have to see debt financing work its way through the system, and see what the level of CMBS pricing is,” said Cruse. Hoteliers have various methods to determine if an econonic slowdown is poised to hurt their bottom lines, such as looking at the level of advance room bookings, said Jay Shah, CEO of Hersha Hospitality Trust. “We’re going to see signals. We’ve been outperforming our budgets [in recent years],” Shah said.”When that shifts, we’ll know that something is going to happen.”