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The State of the Lodging Industry in 2014

The State of the Lodging Industry in 2014

abrahamsonJim Abrahamson, 2014 AH&LA Vice Chair and CEO of Interstate Hotels and Resorts

Lodging: So hotel transactions are heating up. Will this continue in 2014 or are you seeing some more nuances to the market?

Abrahamson: We’ve come off of a couple years of strong RevPAR increases, and after periods of time where we were unable to get substantive rate increases, we’re seeing ADRs continue to rise, which is a positive sign for our industry. There are a lot of good dynamics going into ’14, so we have had good momentum over the last couple of years. We’ve seen inbound international travel continue to increase, and we’ve seen some signs of group business beginning to show recovery, which is the last segment that we’ve been looking for in terms of recovery. So I think we’re poised to have another good year with another 5 to 7 percent range of RevPAR increases that we’re looking at and a lot of it driven by rate.

Lodging: Is there anything else the industry needs to worry about?

Abrahamson: If you look out to the upcoming year, I think there are still a lot of risks in the market and typically the risks that we’ve seen over the last few cycles have been externally generated risks, meaning not necessarily an economic cycle. Both 9/11 and the Lehman brothers crash in 2009 hit at times when the industry was coming off highs and rather unhealthy. We weren’t in great shape at the end of 2000 and through 2001 and going into 9/11, and I think we were coming off of peaks in 2008 when the financial crisis hit. We don’t see a sign of that right now, and probably a part of the rationale is that we’re still in an economic recovery. We think a lot of the fundamentals are solid, low interest rates are encouraging that, and new development has yet to rear its head. Supply issues aren’t necessarily taking root right now, and that would disrupt this in 2014.

Lodging: Do you think that’s going to be a problem in the next couple of years?

Abrahamson: As revenues continue to increase and should we see raw materials and other factors continue to be flat and land costs continue to be flat, I would not be surprised that you’d see new construction start to go on the rise again. Usually as we come out of these periods of time where new construction has been abated there is a period of time before that ramps up into a space where supply growth has a restraining influence on overall occupancies and rates.

Lodging: It seems like it was also being held in check by being able to get new construction financed?

Abrahamson: Yeah, our industry is still coming out of a position where replacement cost has been higher than transaction costs. We’re going to start hitting that spot in the next two to three years where we could find those balances coming back into place, but I don’t think there’s going to be a sizable move up and nor does new construction ever come on with alacrity. I don’t see that being a challenge right now in the foreseeable future, although we’ll start seeing some of it selectively, and it will happen in markets where there are strong dynamics. Urban, select service has been very strong; there are areas in New York where we’ve seen a lot of new construction coming on in the select-service, mid-block developments. Probably what we won’t see are any major project, big full-service, city-center type hotels or big airport full-service hotels. I think that kind of new supply in the full-service, upper upscale segments is probably still some time away. I think upper midscale and upscale select service will see the first signs of increasing. Right now, the growth rates are fairly low.

Lodging: Best Western CEO David Kong mentioned an interesting factoid recently about recessions always happening in the third year of a president’s second term. Is there anything to that?

Abrahamson: There could be correlations but I don’t know that there’s a correlation or a coincidence there. We’re in a cyclical business but the cycles are typically influenced by encouraging new construction. In the 1980s, we had tax breaks, and in the 1990s, there were a lot of strong economic factors—we had a balanced budget in the last part of the ’90s, we were in full recovery, and we didn’t have a war—and there had been no new construction for such an extended period of time. You look at the late ’90s when new construction started coming back, which really peaked in 2000, 2001, creating that unhealthy environment, it came out of a robust economy. And economic health really depends on so many different factors. I think lodging’s particular risk has been new construction, and that risk right now is a little bit more external than internal. There are concerns about the general political climate—we saw what happened for a couple of weeks when the government shut down. I don’t think we’re out of the woods there. And we haven’t seen large-scale crises coming in the past. We wouldn’t have foreseen the S&L melt down in the late 1980s, we didn’t foresee a lot of these issues, 9/11 obviously or Lehman Brothers. We never saw those coming.

Lodging: How can the industry protect itself from some of the dysfunction coming out of Washington?

Abrahamson: I served as the national chair for the U.S. Travel Association [last year], and [I’m] the vice chair [this year] of AH&LA, so I put my money where my mouth is. Our industry needs to have a strong voice in Washington. If you’re not involved, and if you don’t have a voice, then when things do take an unexpected turn, you’re left unprotected and unheard. I think it’s critical for us to be able to underscore the economic impact of travel, the job creation elements of our hotels, and the fact that these shutdowns or these other disruptions really hurt small business owners, they really hurt jobs, and they’re an economic deflator.

Lodging: What do you see being able to be accomplished in Washington that can help out the travel industry?

Abrahamson: Speaking on behalf of the U.S. Travel Association, we’re very focused on the economic impact of inbound international travel, and we’ve been heavily lobbying for items like Brand USA, which is a promotional vehicle for the United States as a destination, reducing wait times in major markets, particularly in China, India and Brazil, and also instituting improvements in customs and border control in order to create a better welcoming experience and get people through lines faster, which will make the U.S. a more desired destination.

We’ve really had a lost decade—we’ve seen how we lost [travel] market share over the last 10 years in the United States to other countries, and while security is critical, vital and important, we believe that the elements of that have sometimes created a discouraging factor on travel. We think that’s an important component, and investing in our infrastructure is absolutely critical as well to be able to welcome these travelers. It’s important that we view this as a job creator, and so increasing the amount of travel internally in the U.S. and inbound international travel is at the forefront of everything we do. At AH&LA, we’re working and lobbying hard for an immigration bill—not the immigration bill. Embedded in the Senate version of the bill there’s the JOLT Act, which has tremendous advantages for the hotel industry, and so we’re pushing hard for that. It’s embedded in the immigration bill that’s been passed by the Senate. The House hasn’t decided to take up an immigration bill yet, and may break it into pieces like path to citizenship and illegal entry and other various components rather than a comprehensive bill.

Lodging: What’s the likelihood of that happening?

Abrahamson: I’ll let you speculate. Our history hasn’t been good in that area, but I do think both parties have been focused on addressing immigration issues. I think there’s a desire that something gets accomplished, the question is in what form.

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