Hard times send hotel industry into 'survival mode'
By Gary Stoller, USA TODAY
Neil Cornelssen says he misses the free cookies in the evening at one hotel and the daily newspaper outside his door at others.
He's also noticing that bath towels in a growing number of hotel rooms are shabby and need to be replaced.
Cornelssen, a sales manager in Marlton, N.J., is one of many frequent travelers who say they see the tangible effect that the recession has had on the nation's hotel industry. Among them: run-down rooms with fewer bathroom amenities, closed club lounges, fewer concierge staffers, slow room service, reduced hours at restaurants and bars, and infrequent airport shuttles.
"The unfortunate reality of today's marketplace," says Hotels magazine Editor-in-Chief Jeff Weinstein, is hotels are "more focused on saving cash than delivering the best service."
Hit by a declining demand for rooms, low room rates and plummeting revenue, hotel companies have laid off hundreds of thousands of employees and are struggling to maintain quality. A record number of hotels are defaulting on mortgage on mortgage payments. Hundreds have been taken over in foreclosures, and some have closed or are about to.
"Because of the recession and the credit bust," says Ed Watkins, editor of the trade publication Lodging Hospitality, "it's the worst downturn in decades — perhaps ever."
As a result, says Robert Habeeb, president of Chicago's First Hospitality Group, which operates 40 hotels in eight states, "The industry is in survival mode."
The toll on the industry is told by startling numbers:
•In January, U.S. hotels had a record-low 45.1% occupancy rate — the lowest January rate since industry statistician Smith Travel Research began tracking data in 1987. Last year's rate — 54.8% — was the lowest ever recorded by the company.
•About 400,000 U.S. hotel employees were laid off during the past two years, says Joe McInerney, president of the American Hotel & Lodging Association. About 1.6 million hotel and motel employees remain, according to the most recent Bureau of Labor Statistics data.
•New hotel construction has declined significantly, reducing hotel companies' opportunities to grow their brands and increase revenue, says Mark Woodworth, president of Atlanta-based PKF Hospitality Research. Construction began on 78 new hotels in last year's fourth quarter, compared with 158 during the same months in 2007, according to Smith Travel Research.
•The total property value of U.S. hotels has fallen by up to 50% from its peak in 2007, according to Fitch Ratings, which provides ratings and analytical commentary to the world's credit markets. Such a drop has limited the ability of owners to sell hotels and improve their credit profiles, Fitch Ratings says.
•A record 15.7% of securitized hotel mortgage loans were delinquent at the end of last month, according to Trepp, which tracks commercial real estate loans. Securitized loans represent about a quarter of hotel loans.
In California alone, 330 of the state's 10,000 hotels have defaulted on mortgage payments since the start of 2009, says Alan Reay, president of Atlas Hospitality Group, a research and marketing company in Irvine, Calif.
Reay says 76 hotels in California and about 500 nationally have been taken over by lenders in foreclosure since the beginning of 2008. Most have continued to stay open for business.
"Banks don't want to take back the keys to distressed hotels in most situations," says Paul Heney of the trade publication Hotel & Motel Management. "They seem to be doing everything they can to negotiate with the ownership groups — to ride out the rest of this economic stress."
Closing a hotel is a huge risk, Heney says. Some believe "that the day a hotel closes its doors, it is worth 50% of what it was worth the day before," he says.
Some high-profile closures
Upscale hotels have been hit hardest, and some have closed.
The W Hotel in San Diego was turned over to lenders in September after its owner, Sunstone Hotel Investors, defaulted on a $65 million loan payment.
The Wyndham Drake in Oak Brook, Ill., closed a month later.
The Drake had "about $3 to $5 million in deferred maintenance when it was shut down," says Ted Mandigo, a hospitality consultant in Elmhurst, Ill. "It was struggling for occupancy and at a negative cash flow."
On May 2, The Ritz-Carlton, Lake Las Vegas, in Henderson, Nev., will close because of a decline in business, says Vivian Deuschl, the chain's vice president.
Meetings business decreased at many luxury hotels, Deuschl says, after Congress scolded insurance giant American International Group for spending about $400,000 at a luxury California resort following an $85 billion federal bailout in 2008.
Budget and non-luxury hotels haven't escaped the downturn.
Sunstone, which owns various Marriott, Hyatt, Hilton, Fairmont and Starwood hotels, has turned over 13 other hotels to lenders. They include the Renaissance Westchester in West Harrison, N.Y., the Marriott Ontario Airport in Ontario, Calif., the Hilton Long Island/Huntington in Melville, N.Y., and the Holiday Inn Downtown in San Diego.
Citing decreased business-travel spending, Extended Stay last June filed for bankruptcy court protection with a debt of $7.6 billion. Its 684 hotels, which cater primarily to guests staying at least 18 nights, remain open. The company has five hotel brands: Extended Stay America, Extended Stay Deluxe, Homestead Studio Suites Hotels, StudioPLUS Deluxe Studios and Crossland Economy Studios.
Despite the industry's deep financial woes, William Marks, managing director for San Francisco-based JMP Securities, says he doesn't believe the industry has been permanently altered.
"We are just experiencing the cyclical nature of the industry," he says. "Unfortunately, this is a more powerful downturn than normal."
More cuts, fewer upgrades
To cut costs, hotel employees now perform a variety of tasks, says Roberta Nedry of Hospitality Excellence, which provides service training for hotel employees. Some brands have replaced experienced concierges with lower-paid, inexperienced ones.
Hotels also have become more vigilant about turning off lights and lowering thermostats, and are closing wings or floors when occupancy is down, First Hospitality's Habeeb says.
Renovation and upgrades are being delayed, says Heney of Hotel & Motel Management.
"Many hotels just can't go through with upgrades, say to flat-screen TVs in guestrooms, as soon as they'd hoped," he says. "A room may not see new furniture but instead get new bedding, lighting and the like."
Hotels' food-and-beverage operations have also had to adjust.
Noticing a drop in corporate travel and spending, two San Antonio hotels — the Omni La Mansión del Rio and the Watermark Hotel & Spa — increased advertising to local residents.
"We were able to draw on new business that at one time may have been overlooked by our properties," says John Brand, the hotels' executive chef.
Managers at the Barona Resort & Casino in Lakeside, Calif., began noticing two years ago that guests were spending less on food and beverages, and dining more at the resort's less expensive restaurants.
Guests began sharing appetizers, skipping appetizers and dessert and ordering a glass instead of a bottle of wine, says Duncan Firth, a chef and restaurant manager at the resort.
In response, the resort instituted discount menus and half-price entrees for some gamblers. This month, one of the resort's restaurants is offering a $9.99 prime rib dinner and bringing back a 10-year-old menu "with prices to match," Firth says.
The opposite may be occurring at some revenue-starved hotels.
Kansas-based business traveler Robert Bender, chief architect for a technology company, says he's seen a big increase in food and beverage prices at hotels.
For guests: Low rates
In January, the average daily room rate in U.S. hotels was $93.93, a drop from $106.54 in January 2008 and the lowest for the month since 2005, according to Smith Travel Research. Similarly, the average room rate for all of 2009 — $97.68 — was the lowest since 2005.
Though the travel industry expects the number of travelers to increase this year, hotel experts don't foresee rates rising quickly.
"Despite early signs of a recovery toward the end of last year, few properties expect to raise prices," says Scott Booker, vice president of Hotels.com. "This could be another year of significant values for both business and leisure travelers worldwide."
Hotels "took a beating" during last year's fourth quarter from corporations demanding rock-bottom room and meeting rates for employees, says Jeff Higley of HotelNewsNow.com, an online trade publication.
McInerney, the president of the hotel trade group, acknowledges the difficulties negotiating in a buyer's market. But he says the country is slowly coming out of recession, and he sees "a little light at the end of the tunnel."
Executives of big hotel companies also see positive signs.
Though Marriott International had a 38% revenue decline and a $346 million loss for 2009, CEO J.W. Marriott last month said the fourth quarter's $106 million profit "exceeded our expectations" and returned the company to profitability.
Marriott said leisure travelers responded to "aggressive marketing campaigns," and business travel "showed signs of improvement." The company opened 38,000 rooms, trotted out two new brands, Edition and the Autograph Collection, and reduced debt by nearly $800 million in 2009, he said.
Matt Avril, hotel group president of Starwood Hotels & Resorts, says his company cut its debt by more than $1 billion and opened 83 hotels last year. Starwood has nine brands, including Sheraton, Westin and W Hotels.
Avril says the company, which lost $107 million in the fourth quarter, has seen a rebound in leisure and business travel, and has emerged from the recession "a battle-tested and more mature organization."
Watkins of Lodging Hospitality says that unlike the economic downturn in the late 1980s, when the industry operated at a loss, it's expected to turn a profit this year and in 2011.
That's possible, Watkins says, because the industry today is more disciplined, "dominated by large companies and savvy entrepreneurs" who are "more sophisticated in marketing and operational techniques."
"Times are tough," he says, "but many hotel owners are measuring that by the fact they can only order a new Mercedes every other year instead of every year."