Hotel Analysts, Execs Wary Of Overbuilding Reprise

<B> Hotel Analysts, Execs Wary Of Overbuilding Reprise</B>

By Maria P. Vallejo

<I>Beverly Hills</I> - More than 1,600 hotel industry leaders gathered at the 13th Annual Hotel Industry Investment Conference here late last month and talked of techniques to forestall the next downturn.

Like those who lived through the Great Depression, hotel veterans of the economic down cycle in the late 1980s fear that history will repeat itself and are mindful of preventing another era of oversupply.

"The industry is in good shape," said James Burba, Newport Beach, Calif.-based Hotel Partners International's senior vice president. "We all have a little bit more money right now. But, we don't want to slip into that road we were on in the 1980s."

A panel entitled "Extended Stay Segment-Headed for a 'Check Out?' " reassured attendees that predictions of overbuilding in the extended-stay segment were greatly exaggerated in most markets. Extended stay upscale and upper-moderate markets are under no pressure, but the lower end of the market must heed industry warnings, panelists said.

"Those of us who were around in the '80s know what can happen when supply overshadows demand and you hit a recession," said Douglas Shifflet, president and CEO of McLean, Va.-based D.K. Shifflet & Associates. "When you look at how many people are staying at extended stay properties, it is accelerating."

Supply growth more than doubled last year, exceeding demand growth, which doubled, said Daniel Lesser, New York-based Cushman & Wakefield's senior director, who noted that lower-tier brands represent about 80 percent of what is now in the extended stay pipeline. This development is primarily taking place in the Southwest, Pacific and South Atlantic states.

The economy and budget markets tend to be experiencing the highest supply growth rate despite their limited demand growth, panelists said. "The demand level for extended-stay in the economy section is lower than the underlying demand," Shifflet said. "Fewer people are staying for very long times in low priced properties, yet that's where all the construction is."

The underlying demand of travelers staying five or more nights in a hotel accounts for 36 percent of the industry room nights, according to D.K. Shifflet & Associates research. Currently, extended stay facilities only capture 2 percent of those room nights. The market will reach saturation at 18 percent. "The market is not near saturation," Shifflet said.

The extended-stay market is expected to draw demand from mainstream hotel demand. The hyped possibility of supply overshadowing demand only pertains to the midpriced segment. The upscale and upper-moderate segments can tap into non-extended stay-specific demand and continue its growth rate.

"Over time--quite a short time, I think--it will pick away at the traditional middle market because there's not a lot of competition there," said panelist Darryl Hartley-Leonard, Chicago-based PGI's CEO.

Overbuilding in any market will have an inverse affect on other categories. Lower markets will pull demand from brands in higher segments. "We're beginning to see wretched excess," said Barry Sternlicht, Phoenix-based Starwood Hotels & Resorts' chairman and CEO. "All new supply brings demand from somewhere."

A poll of participants showed that 53 percent believed the market would become overbuilt in two to five years. Thirty-seven percent of them believed overbuilding will be a problem after five years. Only 6 percent said it would occur within the next two years, and 4 percent believed the industry learned its lesson.

The panelists during the session "Measuring the Pulse: The Outlook for the Lodging Industry" disagreed with the optimistic 4 percent of the audience. Based on historical precedent, moderating development during a positive economic cycle is extremely challenging.

"I believe we will be overbuilt at some point because that's who we are as an industry," said Tom Arasi, Atlanta-based Crowne Plaza Hotels & Resorts' president. "I see it between two to five years because people are still focused on acquisition."

So does Randy Smith, Smith Travel Research CEO, who said that during a seller's market, companies and investors tend to become overzealous with development. Should this first class expansion continue accompanied by an iminent recession, the hotel industry might once again suffer from its own gluttony, he said.