POST SEPTEMBER 11 PREDICTION

OUTCOME

Following the September 11 attacks we will experience a strong, sharp “V” shape economic recovery by mid-2002 rather than a “U’ shaped recovery (weak 2002 and recovery in 2003).

FALSE:

While Q1 2002 alluded to a “V” shaped recovery, the remainder of 2002 to-date has been marked by corporate accounting scandals and stock market volatility.   In addition, the decline in GDP was revealed to have commenced earlier than originally forecast.  As a result, GDP growth of 2.3% for full-year 2002 is expected, followed by 3.1% increase in 2003.  Therefore, the reality is more likely a cross-between a “U” and “W” shaped recovery.

POST SEPTEMBER 11 PREDICTION

OUTCOME

The hotels sector is in a much stronger position to absorb the downturn than during the last recession.

TRUE:

At the operating performance level, hotel profitability has been protected to a large extent by solid reserves and a continual improvement in operating ratios. On the capital markets level, there has not been the number of “fire sales” experienced during the last recession.  Conservative lending, low interest rates and a more educated investment market have meant the mortgage default rate has remained at an historically low rate (according to the American Council of Life Insurers).

Markets and segments most at risk:

-          Large U.S. cities with high proportion of long haul and business travelers.

-          Long-haul fly-over locations.

-          Airport hotels.

TRUE:

-          Large U.S. cities with high proportion of long haul and business travelers – these segments have not recovered at the same pace as domestic leisure demand and therefore hotels in these cities have continued to compete more aggressively on rate to secure business.  The result is continued deep erosion of RevPAR, with cities such as San Francisco, Boston, New York and Chicago recording falls between 10 to 27 percent in RevPAR during ytd July 2002.

-          Long-haul fly-over locations – during the last quarter of 2001, Honolulu registered a 24 percent decline in RevPAR, a reflection of its exposure to the international market.  This decline has softened to a decline of 13 percent during ytd July 2002, making it the fifth worst performer of the U.S. top 25 markets.  The Caribbean experienced a fall of 18.8% over the last four months of 2001.  However, winter increases in tourist arrivals were reported for all the major destinations in the region.

-          Airport hotels - statistics prove that this segment has continued to be the poorest performer, with RevPAR falling by 20 percent in the last four months of 2001.  YTD July 2002 results, while improved, still remain 10 percent below 2001 levels. 

POST SEPTEMBER 11 PREDICTION

OUTCOME

Markets and segments most at risk:

-          Convention cities.

-          New York and Washington D.C.

TRUE:

-          Convention cities – the immediate fallout on convention demand was significant during the latter part of 2002.  The effect is still washing through the market, with convention and meetings, while not cancelled, are notably smaller in attendances.  Cities that have particularly felt this impact include Chicago, Los Angeles and New York, all experiencing RevPAR declines in excess of 10 percent during ytd July 2002.

-          New York and Washington D.C. – definitely hit hardest, recording record drops in RevPAR of between 27 and 37 percent during the last half of 2001.  Performance still remains negative although the depth of the decline has been consistently improving.

Hotel sectors to experience the least negative impact:

-          Drive-to hotel locations.

-          Hotels located on feeder roads.

-          Domestic leisure destination, due to fear of overseas travel and lack of exposure to inbound tourism.

TRUE:

-          Drive-to hotel locations – regional hotel markets have fared better in the 12 months since 9/11.  For example, Houston and Norfolk-Virginia Beach posted RevPAR gains in 2001, with Norfolk building on this gain by increasing RevPAR by 12.4% in ytd July 2002.  Philadelphia was the only other market (in the US 25 largest) to post a RevPAR gain during ytd July 2002.

-          Hotels located on feeder roads – the Highway hotel segment reported the softest decline in 2001 and ytd July 2002 RevPAR of 2.3% and 3.2%, respectively.

-          Domestic leisure destination – have indeed fared better than those cities exposed to international visitors and corporate demand, which both experienced sharper declines and are taking longer to recover.

POST SEPTEMBER 11 PREDICTION

OUTCOME

Hotel sectors to experience the least negative impact:

-          Hotels proximate to technology, communication suppliers and defense.

FALSE:

-          Hotels proximate to communication suppliers and defense – there is little evidence to suggest markets catering to this demand (such as Washington DC, San Diego, Austin, Seattle and Boston) have enjoyed a market premium, although Washington DC has posted respectable performance in comparison to the top 25 US markets.  San Francisco, the biggest city catering to the technology market, was never predicted to be sheltered from continuing declines.

Suburban locations will gain from the potential longer-term shift in corporate offices to those suburb locations in close proximity to major central business districts.

FALSE:

The flight to suburbs has not occurred, but rather city centers remain popular.  In a recent survey of commercial real estate occupiers by Jones Lang LaSalle, the majority of respondents (54%) reported no changes in plans regarding their dispersal of operations by geography or property type, nor did they expect to consolidate locations, reduce locations within CBDs, high rises or trophy locations, or expand operations in suburban locations. 

The gap between bid and ask price in hotel transactions will narrow as owners realize that 2000 was a “bubble” and hotel values have since fallen.

TRUE:

Following a dearth of activity in the six months following September 2001, buyers and sellers finally came together, with transaction volume spiking at just under $1 billion.  This represents a 243 percent increase over Q1-02 levels, although remains 23 percent below the corresponding quarter in 2001. 

Further evidence that investors are being more realistic about asset values is the easing of cap rate expectations over the last six months, as confirmed by the July 2002 Jones Lang LaSalle Hotels’ Hotel Investor Sentiment Survey.  This survey also indicates bullish investment intent, with over one-third of investors indicating they wish to buy hotels.  As we progress into 2003, investors will become more confident in underwriting the U.S. hotel sector and, given the existing pent-up demand, this will help create an environment ripe for transactions.

POST SEPTEMBER 11 PREDICTION

OUTCOME

Insurance premiums will escalate and render the debt markets more difficult to navigate.

TRUE:

Insurance costs have definitely escalated, with increases from 58 to 280 percent cited in Senate hearings during February 2002.  The ability to secure terrorism insurance to a certain extent still remains a key hurdle.  According to a survey by the Mortgage Bankers Association of America, the lack of terrorism insurance has directly affected more than $8 billion in commercial property deals in the first half of 2002.  However, in the hotel sector it appears that the issue of terrorism insurance has not stalled/cancelled any specific deal. For those properties managed by a major flag, the hotel is often eligible to be covered by the management company’s blanket insurance policy.  For individually managed/owned hotels, securing terrorism insurance has been more problematical and costly.

The debt markets are unlikely to shutdown lending to real estate, although capital flows will reduce.

TRUE:

Lending underwent a temporary freeze post 9/11, when the market adopted a wait and see approach.  What followed was a flurry of loan restructuring, in an attempt to adjust to the altered operating ratios and take advantage of the 40-year low in interest rates.  Hotel debt markets have remained open however are characterized by higher pricing (225-300 bps over LIBOR) and lower loan-to-value ratios (55-65 percent).  While lenders remain conservative there is in fact a surplus of debt capital available given the comparatively limited number of deals in the market.