Hotel chief executives this month acknowledged tougher times for the next year and a half and an upcoming corporate hotel negotiating season that will be, from their perspective, more difficult in which to increase rates. The executives also said the United States will comprise a shrinking proportion of their overall portfolio as their development focus moves decidedly eastward.
Speaking on June 2 at the New York University International Hospitality Industry Investment Conference, Marriott International chairman and CEO J.W. Marriott Jr. said he is seeing softening in both corporate and leisure travel and that the company expects North American revenue per available room to increase year-over-year by about 2 percent in the second quarter of 2008. Marriott, who noted that business travel accounts for about 80 percent of his company's revenue, said corporations are cutting back on travel, last-minute group bookings are slowing and the company is preparing for "a tough economic environment and some very difficult negotiations."
"We haven't gotten into the pricing season with our big customers yet, but we expect them to push for some discounts," Marriott said. "We haven't seen much discounting yet, and there will be some."
Barry Sternlicht, chairman and CEO of Starwood Capital Group, said to expect the softening to continue for at least 18 months. Some markets, such as Las Vegas, already have begun discounting, and hoteliers' rate hikes in past years in spite of occupancy declines leave them in a precarious position.
"The U.S. consumer is stretched, and we've been waiting for him to collapse for quite some time. Businesses will do what they've always done in every cycle: tighten their belts," Sternlicht said. "It's going to be worse before it gets better."
In addition, hoteliers should expect a slowdown in state and city government travel, particularly from secondary and tertiary cities, said Lalia Rach, dean of NYU's Preston Robert Tisch Center for Hospitality, Tourism and Sports Management. "There is a credit crisis at the city and state level," she said. "When you look at these secondary cities and tertiary cities, city and state government makes up a huge part of their business."
Blackstone Group senior managing director Jonathan Gray, whose firm acquired Hilton Hotels Corp. last year
(BTNonline, July 9, 2007), said he also is cautious in the current economy, although some factors are tempering demand softening. "The weakened dollar has certainly helped the gateway cities," Blackstone's Gray said. "Business has held up surprisingly well."
Starwood Hotels & Resorts CEO Frits van Paasschen said he expected business travel, which accounts for about 75 percent of Starwood's business, to keep revenues flowing during the downturn. While some segments are cutting back on travel, others have not, he said. Marriott said some, such as the defense industry, have been increasing travel.
Starwood Capital's Sternlicht said hoteliers face further demand softening should airlines continue capacity cuts, although thus far increasing fuel costs have not visibly deterred travelers. He added Wall Street analysts often don't give the resiliency of the industry enough credit, as companies generally are able to stay afloat even in the more difficult periods. Marriott said the company's business model is well-equipped to handle down cycles.
"I've been through six of these, and this will be my seventh," Marriott said. "People will still travel, though they may not quite as much. I don't want you to walk out of this room thinking this industry is going down the tubes, because it's not."
Starwood's van Paasschen said the somewhat stable performance thus far also was a good indicator. "Usually we're doom and gloom by now," van Paasschen said. "That's also a reflection that there's been less supply coming to the marketplace."
Blackstone's Gray also pledged long-term confidence in the industry, and said there are no plans for major divestments. "I would be shocked if we didn't stick with lodging," Gray said. "It's an area where we've developed a lot of expertise, so to exit this business doesn't make sense."
The firm now is focusing on shifting its deluxe collection, LXR Luxury Resorts & Hotels, into the Hilton brands, he said.
"Some will become part of the Waldorf-Astoria Collection, some will become Conrads, some will become core Hiltons and some will be part of a soon-to-be-announced boutique brand," according to Gray. "This company is under-penetrated on the luxury side."
Not all of Blackstone's hotel assets will be merged in with Hilton, however. The midprice La Quinta Inns and Suites will remain separate, Gray said. Although the firm looked at incorporating it under Hilton control, he said it didn't fit in with the best interest of La Quinta's ownership and franchisee base.
Starwood Capital also is increasing its luxury footprint. In recent years, Starwood Capital has launched a luxury brand named after crystal manufacturer Baccarat, in which Starwood Capital has a majority interest, as well as a "green" luxury brand, "1." Sternlicht also indicated plans to bring the ultra-luxury Hotel de Crillon, an icon in Paris, to other markets, although there's a limited number where it would fit, he said.
Sternlicht said there would be further growth through acquisition. "There are other companies we're looking to buy, but the cycle is tough right now," according to Sternlicht. "I really am bullish on real estate in the long run in hotels, but it's going to be a rough couple of years."
The executives said their companies would become increasingly international in scope over the next several years. Blackstone's Gray said that Hilton's U.S.-international ratio of number of hotels stands at about four to one right now, but that over the next five years, it would move to a 50-50 split.
"The scale of the opportunities and growth rates are much higher internationally," Gray said. "This is still the biggest and most important market in the world, but it's just not growing as fast."
Marriott said his company is now about 25 percent international and is moving toward increasing that to 50 percent of all properties, perhaps in 10 years.