Trick or treat?
July optimism was shaken immediately upon the August 5 downgrade of the U.S. credit rating. It only got tougher as Greek sovereign debt problems spread throughout Western Europe, growing into a full-blown euro bank crisis. The U.S. jobless rate remains high, fears of a double dip have increased and investors have hit the exits, resulting in major stock market declines throughout the globe. The swift downdraft of public lodging stocks is nothing compared to the 2011 third-quarter declines in various global stock market indices: -12% for the DJIA, -14% for the S&P, -21% for the Hang Seng Index and -25% for the major German and French markets. Investors fled to safety and drove the 10-year U.S. Treasury yield down to 1.71%, a level not seen since the late WWII era. Federal deficits, an uncertain regulatory environment and threatening tax increases top off what otherwise looks like a stormy election year and panicked politicians. See Rich Warnick’s most recent blog post for some additional doses of reality.
Meanwhile, the prolific buying spree by public lodging companies has come to a halt along with evaporated mid-teens multiples, and the buying void expected to be filled by private equity, foreign investors and high net worth individuals has yet to show itself. A dearth of debt capital has only become more restrictive in recent months, so it will be difficult for private investors to fully replace the public investor unless they do so at lower unleveraged yields, or perhaps at lower valuations.
So where’s the treat, you might ask?
For starters, the first two weeks of October have demonstrated substantial bounces in broader investment activity, with the DJIA recovering 9%, the S&P rising 11% and the French CAC 40 regaining 18% from its September low. Evidently the global financial crisis is over, again. Phew.
In the hotel business, one can still point to a complete lack of new supply and continued strong lodging results in August and September in the face of the above macroeconomic turbulence. Group pacing improvements seem to be holding up. Until now, fundamentals have been strong despite the pullbacks in technical capital flows. It appears as though the stronger technology sector may replace financial services as the higher paying corporate customer. Long live social media.
Certain public lodging company executives are suggesting that current low valuations ignore strong fundamentals (though they were strangely silent a year ago). Prognosticators have recently suggested the long-term historical correlation of GDP to hotel demand has changed and that perhaps a better relationship is corporate and consumer activity.
How fragile are otherwise strong lodging industry fundamentals? Will slow growth expectations also slow hotel investment activity? Who really knows where we are headed?
I do know that when we start hearing about “paradigm shifts,” it can get really spooky.