Am I living in a parallel universe?

Am I living in a parallel universe?

In early August, Warnick + Company sent an advisory note to the owners of our asset-managed hotels alerting them to the possibility that 2012 might be a difficult year, in spite of what they might be hearing from brands and industry prognosticators. We were, of course, rooting for the rosy published forecasts — but in light of what we were seeing in the economy, preparing contingency plans for a less rosy scenario seemed to be a wise approach.

During the ensuing month, we saw nothing to change our jaundiced view of the economy. Two weeks ago, I moderated a capital markets panel at the fall meeting of the Hospitality Asset Managers Association. In my opening comments, I rattled off a list of not-so-pleasant factors that were, in my opinion, creating strong headwinds for the lodging sector. On that same day, PKF came out with a revised forecast of RevPAR growth for 2012 — 8%, which was up half a point from its previous prediction of 7.5%. STR, which had been predicting 7% to 7.5% for a while, cut its forecast slightly, but was still at 6.5%.  

In spite of the industry’s recent robust RevPAR gains, I was — and still am — scratching my head over these projections. There seems to be a disconnect between what I see, read and hear external to the industry and what is being predicted for the industry.  

In the universe I used to live in, hotel performance was tied to the economy. Apparently, that is not the case in this parallel universe in which I now find myself.

True, if one were to draw a trend line based on the prior 12 months, the balance of this year and 2012 look very encouraging. Supply increases have been mercifully held in check, and there is compression-based pricing power in numerous top-tier markets (he said as he sat in his US$725 room in a New York hotel that was less than US$500 a week ago). And booking pace may look good going into 2012. BUT, what about …

  • A U.S. economy that has for months been teetering on the brink of another recession (a USA Today poll published September 21 said eight of 10 people surveyed believed the economy was already in a recession)?
  • A continuing (possibly worsening) crisis in the U.S. housing sector?
  • Continued high unemployment and dismal prospects for U.S. job growth?
  • Depressingly low U.S. consumer confidence levels (the University of Michigan Consumer Sentiment index stands at 59.2%)?
  • Grim seasonal retail forecasts?
  • A European debt crisis so serious that it threatens the euro and, in fact, the viability of the European Union itself?
  • Continuing Middle East unrest and the potential for adverse impacts on oil prices?
  • A radically polarized U.S. federal government and uncertain policies affecting business investment?
  • A near bear market that has taken investors on an unwanted roller coaster ride for almost two months?
  • Continued unsustainable deficit spending by the U.S. government?
This list is not new; it is, with minor modifications, the same list we sent to our owner clients in July. And, quite frankly, it could be longer.  

But like characters on the Sci-Fi show “Fringe,” I and my W+C colleagues find ourselves in an alternate universe where …

  • Hotel demand is not linked to the economy.
  • Pre-booked group room nights are equal to “consumed” room nights without regard for potential fall-off from the block if the market goes sideways. 
  • Negative consumer sentiment does not translate to more cautious consumer spending (including travel).
  • Recent performance trends definitively determine future performance.
In our old universe, operators went into rate free fall at the first sign of a decline in business — even after the Great Recession. For instance, the loss of the Japanese market in Hawaii after the tsunami convinced us that operators/brands learned nothing about rate integrity from the recession. As soon as this important market segment went away, the big hotels in Hawaii began cutting rates and trying to steal business at any price.

If, indeed, the pundits are right and lodging demand is now decoupled from other economic and social factors, I must admit, I like this parallel universe better.  

But if we still reside in our old one, it seems we are, unfortunately, vox clamantis in deserto.