Lodging Sector’s Fortunes Tied to the Larger Economy

By Maria Maslovsky, Assistant Vice President, Moody's

The dramatic fall and equally striking rise of RevPAR in the hospitality sector has once again demonstrated that lodging is the most volatile of the property sectors because of its shortest "lease term" -- typically, one night.

By Maria Maslovsky,
Assistant Vice President, Moody’s

The lodging sector, having experienced the sharpest downturn of the REIT property sectors during the recent recession, was on the quick path to recovery in 2010 and into early 2011. The dramatic fall and equally striking rise – with revenue per available room, or RevPAR, dropping and then increasing at double-digit rates – have once again demonstrated that lodging is the most volatile of the property sectors because of its shortest “lease term” – typically, one night.

The latest recovery was due primarily to business travel, which grew in tandem with corporate profits as the recession dissipated and the capital markets stabilized.  The increase in profits led to the resumption of meetings and conventions, which brought back corporate bookings.  In contrast, leisure travel remained lackadaisical owing to persistently high unemployment and tepid consumer confidence.

Meanwhile, the fundamentals of the hospitality business have been positive.  The historically minuscule supply has been particularly encouraging for an industry known for boom-and-bust cycles brought on by overbuilding.  For the remainder of 2011 and into 2012, the key question for the industry, as well as for the U.S. economy in general, will be whether the demand will exist.  Lodging is a pro-cyclical segment of the economy, and as economic growth slowed in the summer, so did RevPAR, which declined from a year-to-date (through August 2011) growth rate of 8.1 percent, to 7.2 percent in the month of August, according to Smith Travel Research.  On the positive side, however, the first two weeks of September bounced back, with 12.8 percent and 10.1 percent year-over-year RevPAR growth, followed by 8.3 percent in the third week of September, also according to STR. Although these latest trends are encouraging, the industry dynamics, in the context of a broader macroeconomic equilibrium, are still fragile.

We believe that this uncertain environment is likely to affect the REITs unevenly, with the extent of the impact depending on the dominant chain scale in their portfolios.  Luxury properties have performed the best on the upswing (while suffering some of the worst losses during the downturn), with upper-upscale, upscale and midscale properties posting weaker but still positive growth.  Nevertheless, absent a severe exogenous event or significant macro-economic deterioration, we do not anticipate a material decline in the lodging REITs’ credit quality.