Lodging Economics Weather the Storm

Despite the uncertainty surrounding the highly publicized credit crunch that began during August 2007, the economic fundamentals of the US lodging industry continue to be strong. What started as a crisis in the US residential subprime mortgage arena has bled into a re-pricing of risk across all asset classes including commercial real estate. Worldwide, capital markets are currently experiencing skittishness and a heightened sense of uncertainty about the future. As in previous times of uneasiness (i.e.: October 1987 stock market crash, 1998 Russian financial crises, Sept. 11, 2001) the outlook for the near term ranges from highly pessimistic to optimistic.

Through the first three quarters of 2007, the US lodging industry has experienced an unprecedented level of merger and acquisition activity. Healthy industry operating metrics, along with an abundance of institutional and private debt and equity capital, has resulted in a significant number of corporate entity and property level deals. The recent closing of the record setting $26-billion acquisition of Hilton Hotels Corp. by the Blackstone Group is a tremendous vote of confidence and implies a long-term positive outlook for the sector. The deal, which was announced in early July 2007 just prior to the credit crunch, was financed by a consortium of some of the biggest names on Wall Street including: Bear Stearns, Bank of America, Deutsche Bank, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley. Many believe the closing of this blockbuster transaction at the end of October 2007 during a tightened credit market could inspire confidence in other private companies executing similar buy-outs.