CHICAGO—Bob Habeeb has more than 25 years of experience in the hospitality industry, and as chief executive officer of First Hospitality Group, Inc., a Rosemont, IL-based management and development company, he keeps his eye on all the latest developments. Although the economy seems generally healthy, he tells GlobeSt.com that there could be a few clouds on the horizon for the hotel sector. Still, he has some advice for his colleagues, and believes that if they follow it, those clouds won't develop into a storm.
In general, here does the hotel industry stand now?
Generally strong RevPAR growth and ongoing expansion that has blossomed into a development boom have made the lean recessionary times of the late 2000s seem like a distant memory. While there is no reason to think that the next downturn will be anything near as punishing as the last, there are signs that we have seen a market that has already peaked.
What about Chicago's hotel sector?
In Chicago the rate of growth has slowed noticeably in recent months. The Windy City has had a great year so far, but hotel owners and operators who know the market well are concerned–not only about the fourth quarter of 2015, which is expected to remain somewhat sluggish relative to the last two to three years of strong performance, but what will happen next. The expectation is that 2016 might get off to an underwhelming start.
It is trickier to predict much further beyond that, because there are a number of moving parts to consider. While there is a large amount of hotel product that will be opening soon in Chicago, and still more in the pipeline, leisure demand continues to be incredible. The million dollar question for 2016 is whether the leisure demand will be robust enough that it will mask all the new additions to the supply side of the equation. I suspect the answer is "no" on a yearly basis, but that late second quarter and into the third quarter of next year, we could see a boost as a result of summer travel traffic. While Chicago remains a premier leisure destination, the state's budget crisis has sliced its spending budget on tourism promotion. Along with tax increases and the fact that next year is an "off" convention year in the city's three-year convention cycle, there's good reason to treat the continuing spike in supply as a legitimate cause for caution.
What are some signs that the market has peaked?
The development cycle is clearly still going full tilt. Midwestern markets like Milwaukee, Minneapolis and Omaha–and even secondary markets like Ann Arbor, MI–share Chicago's fear that the rate of increase in product will outpace the rate of growth in demand. In fact, we are seeing a kind of market saturation in many markets, where the high-profile "go-to" brands are reaching a saturation point and prompting developers to consider secondary or nontraditional brands. As the competition stiffens and supply continues to rise, the weaker performing hotels are inevitably going to struggle. It's what happens next that worries me.
How should those in the industry respond to a slowdown?
The only thing that might make a downturn sharpen into a cliff is if we are our own worst enemies and become irrational with rates. Starting sometime next year in many markets, I expect that we will see some relatively moderate softening in demand. Occupancies will see a modest drop off, but will hang in there for the most part. Now, if industry professionals respond to those developments rationally, the falloff will likely be somewhat benign. But if they go to market with deeply discounted rates in order to try and stimulate demand, it could set off a cycle where everyone else feels like they have to respond accordingly. In that scenario, occupancy may only drop two points, but performance will crater as larger numbers of hotels start to hyper-discount and we see a race to the bottom. The good news is that there is no rational reason for that behavior, but the bad news is that has never stopped us in the past.
Are you still optimistic as we head into 2016?
Barring some dramatic and unusual events or an unforeseen global crisis, we should be able to withstand the overbuilding that is continuing. It's even possible that it won't be room rates, but interest rates that may play the biggest role going forward. That is the one elephant in the room that isn't getting enough attention. Even in the 2008 to 2009 cycle, many operators didn't go out of business, because the cost of capital has been so cheap. If the Fed starts to raise interest rates, however, and we see a precipitous run-up in interest costs it would be extremely challenging for the industry. Just one more thing to track as we move forward into what promises to be an eventful 2016.
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
