Van says hotel land owners with projects not yet under construction are the most exposed to a recession.
DALLAS—Everyone knows there will be a recession affecting the hotel business but no one knows when that will be, says Steve Van, president and CEO of Dallas-based Prism Hotels & Resorts. As an example, Van quotes noted economist, Scott Sumner, who says, “no one is able to consistently predict recessions.”
Van recently shared insights on the hospitality industry, including a 2019 forecast in this exclusive. He notes that generally, the earlier a hotel project is in the development cycle from land acquisition to stabilized hotel sale, the greater the risk the hotel will be impacted by the recession, whenever it comes.
That's because of the multi-year time required for successful development, Van points out. If it's a three-year timeframe, projects beginning now will have a full three years of exposure to a recession (most would bet there will be a recession by 2021), while hotels that are stabilized and ready for sale now have a shot at selling before the next recession.
“Hotel land owners will be most negatively impacted,” Van tells GlobeSt.com. “If you own developable land and are not under construction, you are the most highly exposed to the timing of the recession. And each month that goes by, it becomes more likely that you will be trapped by the construction lending evaporation when recessions begin. Carry costs will mount.”
Van goes on to say that hotels in pre-development which have not closed on construction loans will be very exposed when the recession starts. He points to the 1,594 projects in early planning, a 31% year-over-year increase, and 2,144 projects that will start construction in the next 12 months.
“These are racing the recession,” Van cautions. “In the past, a loan commitment didn't stop lenders from refusing to close construction loans. The loan spigot can turn off in one day as it did in 2008. Costs are rising and time is running out to lock in a total project price. Additionally, development costs are increasing because of the tariffs.”
For hotels under construction, the biggest concern will be deteriorating demand, especially in group bookings, Van says. There are 1,638 hotels currently under construction, which is close to the 2008 high, and each is at risk of failing to meet pro forma expectations when recession comes. Demand is driven by expectations of the future, whether for leisure or business, and a hard-hitting downturn will immediately reduce demand of all types, he portends.
With hotels that were opened with high debt levels, the profit always goes down during a recession, and any pro forma as well as debt service covenants will be under pressure, Van says. Short-term loans could be problematic if the maturity comes before the downturn is over.
Hotels that were opened with low debt are the best positioned to survive no matter when the downturn.
“Again, the earlier in the development cycle your hotel is, the more you are exposed to what we all believe will be coming,” Van tells GlobeSt.com. “Hotels that are stabilized and ready for sale: sell now. The longer you wait, the greater the likelihood of cap rates increasing as they always do in downturns.”
Recession or not, there is good news and bad news for 2019, he says. The good news? Brands are negotiating better deals with the online distributors such as Expedia, which will lower costs of reservation acquisition. Finally, Airbnb is coming under pressure from owner and brand interest groups such as AHLA which are pressuring cities to make Airbnb play by the same safety, tax and service rules with which hotels are burdened. The bad news is rising costs in labor expenses, slowing ADR growth and increasing interest rates, Van highlights.
He says while it's impossible to predict if there will be a recession, it is certain that all stages of hotel development and ownership are currently exposed to the risk of damage to varying degrees.
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Lisa Brown
Lisa Brown is an editor for the south and west regions of GlobeSt.com. She has 25-plus years of real estate experience, with a regional PR role at Grubb & Ellis and a national communications position at MMI. Brown also spent 10 years as executive director at NAIOP San Francisco Bay Area chapter, where she led the organization to achieving its first national award honors and recognition on Capitol Hill. She has written extensively on commercial real estate topics and edited numerous pieces on the subject.
