The upscale hotel segment in the United States had perhaps never traversed such a major crisis. From the upscale segment to luxury properties, on East Coast and West Coast alike, all 4-5* American hotels have been pulled under by the “subprime” whirlpool and have not yet risen back up. The unease was latent already in 2007, but the process has speeded up since the collapse of Lehman Brothers. The financial crisis has led to budgetary restrictions for individuals and corporations alike, clearly penalizing the occupancy rates at properties. This trend has brought about the happiness of the midscale range which has proved to be the most resistant in today's climate. To make matters worse for the local stars, the AIG* syndrome and the quest for a low profile compounded ambient wariness by discouraging ostentatious luxury.“We continue seeing opportunities for our luxury and upperupscale brands at key destinations that are both leisure and business. For the current year alone, we opened hotels in Atlanta, Dallas, Hollywood, Miami, Philadelphia and Washington D.C. These markets all represent strong potentiel for Starwood because they are hubs with resistant business sectors, solid infrastructures and international access,” explains Roeland Vos, the president of Starwood Hotels EMEA. Good government means already foreseeing the way out of the crisis.Faced with this stagnation, 4 and 5* hoteliers had no other choice than to very clearly revise their room rates. The last trimester 2008 proved particularly difficult. Starwood, with its supply positioned almost exclusively on this segment, saw its room revenue drop by 13.2%. At the heart of the IHG's North America division, InterContinental fell by nearly 12%. The drop for Crowne Plaza was close to 9%.Unfortunately, a year after the deflagration, the market is still just as depressed. In the second quarter 2009, Marriott posted a drop in its RevPAR by 23.5% caused by a 14.7% decrease in the average daily rate for all three brands Marriott, Ritz-Carlton, Renaissance. The group is not expecting to see any improvement before the end of the year. Its forecasts for 2009 are seeing a drop by 17 to 20% across all brands.This past summer may have been relatively satisfactory for leisure destinations - in Florida in particular - thanks to domestic clientele who remained home for once, the announcement of a timid relaunch of the economy should not have any immediate impact on the profitability of hotels. In fact, most analysts are hardly optimistic about the year to come. “In 2010, the RevPAR should show a new drop by 2.4%,” anticipates Arthur Adler, CEO Americas of Jones Lang LaSalle Hotels. Always ready to benefit from clearer skies, upscale hotels will take a little more time to bring their average room rates back up. They are not likely to be up again before 2011, when observers hope to see global growth in the RevPAR by 7.3%.Bogged down in this price war, hoteliers are not ready yet to bury the hatchet. They should, for a certain amount of time still, offer attractive “deals” to leisure tourists and meeting planners to sustain their saw-toothed activity. In hopes that the good Travel practices implemented by companies during the crisis (lower in range, shorter stays, videoconferences) - all low punches that directly affected upscale hoteliers won't durably change the deal.Another element risks slowing recovery as well: a new phase of openings that was prepared some time ago (see the following pages) is causing already weak demand to telescope as a result of bad timing. Very high occupancy rates in Phoenix, Washington and San Diego whetted developers' appetites. New York which flirted with undercapacity in the middle of the last decade - should see over 10,000 rooms open with, as primary attractions, Ink 48 by the Kimpton group, the residence-hotel W New York Downtown, the Andaz Wall Street and the Mondrian SoHo. For the country overall, the year 2009 should be marked by a record number of openings: 1,425 hotels and 156,653 rooms according to US expert Lodging Econometrics. The phenomenon is not nearing its end as 124,000 new rooms are expected in 2010 while 75,000 are scheduled for 2011.Nonetheless, one question must be asked: will all these hotels become realities? Nothing is less certain. Lodging Econometrics has already revised its previsions. The aforementioned figures for 2010 are revised down by 15% for the number of openings. And in the second quarter 2009, the analyst recorded the postponement or cancellation of 507 hotels for 76,726 rooms. With the contraction of available credit, some ambitious projects are having difficulty getting financing.Among others, the Shangri-La in Chicago fell victim to the collapse of multi-use complexes. Locking the means, its developer suspended the construction of the Waterfront Tower, which was to be the 5th tallest in the city. The Hong Kong group is dogged by bad luck because its Las Vegas hotel is also on hold. Part of the Echelon mega development by Boyd Gaming, the project has been postponed sine die. The city of games was hit full force by the collapse of the casino industry and, in Las Vegas, the group is unfortunately far from being the only one waiting to see what will happen.The disturbing consequences of this long period of crisis will not be limited to projects to come. It is beginning to seriously weight on the profitability of existing properties as well. Hoteliers are bracing themselves by reducing their costs to the vital minimum. But these urgent measures do not always suffice to keep full service upscale hotels with high operating costs afloat. With an increasingly limited cash flow, some properties are suffering in order to meet their obligations. According to the agency Fitch Ratings, last July thirteen of them were unable to reimburse their loans. Among them were the Pointe South Mountain Resort in Phoenix (loan of $190 million), Loews Lake Las Vegas ($117 million) and the Dream Hotel in New York ($100 million).Le Renaissance in St. Louis, the W InterContinental in Scottsdale, the Ritz-Carlton Lake Las Vegas, the Sheraton Downtown Orlando… the number of assets in distress is multiplying. The famous Ilikai in Waikiki, Hawaii also closed its doors. In the months and years to come, this list should gradually grow as debts come to maturity. “With no immediate revival of demand in sight and recent-vintage hotel loans unlikely to meet projected performance levels, loan sponsors are increasingly depleting reserve accounts or are being forced to come out of pocket to service debt shortfalls, each of which are a precursor to potential future default,” remarks Susan Merrick, Managing Director of Fitch.Paradoxically, this phenomenon could benefit hotel groups with more solid foundations. These bankruptcies open up opportunities for acquisitions and conversions. Marriott just fell short in the buyout of the historic resort Greenbrier, but other opportunities for acquiring “trophy assets” should arise. Particularly since, despite current difficulties, leaders in the upscale hotel industry are preparing for the future and have not abandoned the idea of developing their supply in North America.“We continue seeing opportunities for our luxury and upperupscale brands at key destinations that are both leisure and business. For the current year alone, we opened hotels in Atlanta, Dallas, Hollywood, Miami, Philadelphia and Washington D.C. These markets all represent strong potentiel for Starwood because they are hubs with resistant business sectors, solid infrastructures and international access,” explains Roeland Vos, the president of Starwood Hotels EMEA. Good government means already foreseeing the way out of the crisis.
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