SAN FRANCISCO-Supply and demand took center stage at the morning Lodging and Resorts Panel of day two of NAREIT's REITWorld 2013. Moderator William Crow, managing director of Raymond James & Associates, talked about the lodging industry, noting that it “operates in its own cycle set against an economic cycle.”
According to Crow, “it is a unique backdrop given supply and demand and some of the drivers out there.”
Panelist Kenneth Cruse, CEO, Sunstone Hotel Investors Inc., pointed out that there is no typical cycle. “We see this cycle as having all the earmarks of a longer duration of lower growth,” he said. “Some of the demand drivers that have been very robust have just started to roll into the fold.”
Supply also hasn't really come into the picture, added Cruse. “Right now supply is very muted… We are seeing more of the same from what we have seen thus far. We think it is good business to plan for the worst and hope for the best.”
Jon Bortz, chairman & CEO, Pebblebrook Hotel Trust, agreed that there is a “typical cycle” out there for the lodging industry. “We have a macro cycle of the economy and a micro cycle of supply and demand.”
But things are very market by market, added Jay Shah, CEO, Hersha Hospitality Trust. “It is very tough to make blanket statements about when the lights are going out in the market.”
When you look 10 years ago or 20 years ago, the things that affected the cycle were the imbalance between supply and demand, explained Colin Reed, chairman & CEO, Ryman Hospitality Properties Inc. But since then, “we have seen that this world has become a global economy—a massive shift in the industry. These massive changes that we are now enduring because of the global economy are affecting our business.” He added that “you have to have a strong balance sheet and make sound acquisition decisions and if something comes out of left field to throw things off balance, you have to endure it.”
The association business, Reed added, “is alive and well. … I don't think NAREIT, for example, is worried about booking in 2017 and 2018. We are still seeing a lot of that kind of business. And the corporate side is reasonably healthy.”
As for what we can expect going forward, Shah said demand will continue to grow. “When we look at the GDP growth rates, although it is muted, relative to some recoveries, it is still pretty strong…It is driving business travel.”
Shah adds that today is “an interesting era in travel.” More and more people around the globe are entering the middle class than ever before, he said, and middle class folks travel and go see the world. “We are fortunate here in the US that our gateway cities are high on people's list.”
As for unemployment, Shah says it will tick down and will drive the GDP. “You will have interest rates stay low through this administration. And as long as they stay low, we will continue to see GDP growth.”
According to Cruse, “there has been a disconnect in this cycle between the government component and the corporate component.” There has been weakness on the government side, but far more growth is driven by corporations, he said. “You will continue to see that over the next few years.”
The way the government booked groups has changed radically, added Reed. “Our company has weaned itself out of that business...if it comes back, great.”
One of the trends Reed has also seen in the industry is that delegates are trying to take a day out of a three day stay. “People are being a bit more frugal in their length of stay… If this economy expands in 2014, it will be good for the group sector.”
Cruse added that groups could potentially be a driver of growth. “If government business comes back, it will be real nice for lodging's future. Supply will come down to a market by market study.”
There is a lot of new supply in New York, Cruse added. “It is an anomaly compared to other markets. Most of us have portfolios that are very well protected from new supply.” In the long term, Cruse added that he is “very bullish on the New York market… But it comes down to what street corners you are located on.”
Shah sees great opportunity for value-creation for REITs in development. “Some of the constraints for those developers is access to capital and REITs have access to capital.” But he warned that there might be better places to put capital than something that will take two or three years for the EBITDA to deliver.
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Natalie Dolce
Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.
