No Vacancy: Duff on Hospitality Law : Northwest Attorneys & Lawyers for Hospitality, Travel & Tourism based in Seattle

Some additional observations from the two days’ meetings:

• The much publicized industry recovery is definitely a regional or local recovery being led by both coasts of the United States and the top 25 markets.  Despite record level demand in 2011 (over 1 billion room nights sold), many markets in the Midwest, South and other regions continue to suffer.  
   
• A number of the owners and operators I spoke with felt that the 2012 forecasts presented by PKF and STR at the conference the day before were rather conservative.  Several owners and operators (with properties in multiple markets) indicated that they anticipated exceeding forecasted REVPAR increases. 
   
• Debt continues to be a mystery for many.  Those I met with represented both ends of the availability spectrum with debt being either impossible to obtain or readily available.  Construction financing seems to be returning on a limited basis for quality developers in quality markets.  One national developer I spoke with indicated that construction financing was becoming easier to obtain through national and regional lenders at approximately 65% LTC with limited recourse.
   
• The much publicized refocus on enforcement of brand standards by the leading franchise companies appears to be limited to top tier franchisors only.  Second tier franchise companies may be increasingly willing to waive or postpone standards requirements to maintain or grow needed distribution.
   
• Nearly everyone believes that lenders and special servicers will grow increasingly impatient with nonperforming loans and take needed steps to bring those properties to market over the next year.
   
• The Northwest continues to be an area of interest for lenders, investors and operators.  All but one of the investors featured as part of the ALIS Talks Money segment (including Aimbridge Hospitality, Apple REIT Companies, Carey Watermark Investors, Felcor Lodging Trust, HEI Hotels & Resorts, Kimpton, Noble Investment Group and Thayer Lodging Group) identified the Northwest as a prime target for 2012.
   
• Unions were surprisingly active this year.  At least two developers I spoke with mentioned that they had been approached by union representatives at the conference to discuss the developers' design review and staffing plans for their new hotels.
   
• As you might imagine, a great deal of discussion surrounded the recent launch of Room Key (see my colleague Ruth Walter’s recent post on the Room Key launch) and its effects on the current distribution landscape. One of the more interesting panel discussions occurred when Michael Shannon, managing director of KSL Capital Partners, questioned whether Room Key would succeed. Michael’s co-panelists, Richard Solomons, CEO of Intercontinental Hotels Group (one of the website’s founding partners) and Steve Joyce, President and CEO of Choice Hotels (also a founding partner of Room Key) strongly disagreed. Only time will tell whether this new travel search platform receives the acceptance necessary to make it a long-standing player in the on-line travel distribution landscape.

Finally, for those of you that were not at ALIS and are interested in seeing PKF’s 2012 national forecast, I’ve attached a complete copy of Mark Woodworth’s presentation here.

I look forward to seeing everyone at next year’s conference in January 2013.

Collectively, the presenters were extremely bullish on the region's prospects. Following several weeks of negative economic news, the positive opinions expressed by most of the presenters were well received by most everyone's ears.

Highlights from this year's presentations include the following:

• Notwithstanding the U.S. economy's struggle to generate any real employment growth, the Seattle market over the past year has seen solid employment growth with a large number of those jobs being added in the leisure and hospitality industry
• The Puget Sound market will likely be the best market (economically) of all West Coast markets over the upcoming year or two
• The U.S. and Seattle lodging markets continue to enjoy unprecedented growth in lodging demand
• Seattle's increase in lodging demand, when compared to other key markets monitored by STR, ranks second only to Denver
• National ADR levels are not expected to return to pre-recessionary levels for another 2 years, while Seattle's ADR may not return to pre-recessionary levels for at least 4 more years
• Seattle's YTD numbers as reported by STR: Occupancy 63%, ADR $108.33 and RevPAR $67.78
• PKF forecasts annual demand growth of 4.5%, 3.8%, 2.5% and 3.4%, annual occupancies of 67.9%, 70%, 71% and 72%, and annual ADR growth of 3.2%, 7.2%, 6.8% and 6.2% for 2011, 2012, 2013 and 2014, respectively
• According to the U.S. Department of Commerce, Seattle and Washington led the U.S. in growth of overseas visitors in 2010
• Seattle is forecasted to welcome an unprecedented number of cruise passengers in 2012 (440,000) with sailings scheduled for Monday, Tuesday, Friday, Saturday and Sunday of each week during the prime cruise season

If you would like more information about any of the presentations, please let me know.

Congratulations to Dennis Clark, Howard Cohen and the entire Seattle Hotel Association for putting together another terrific annual symposium. See you next year.

While tempered optimism was a refrain I heard often repeated in the hallways, I think it correctly captured the mood of those attendees who sat through the bullish industry forecasts presented by STR and PKF early on Monday morning and who are now charged with meeting or exceeding those forecasts. This healthy skepticism (which is always present during the early years of any industry recovery) has been compounded by the unique and drastic effects of the prior 3 years and the sometimes tenuous nature of the current recovery.

With this contrast in mind, the highlights from this year's Conference include . . .

1. While the world economies definitely appear to be on the road to recovery, we're all likely headed to a different location. In other words, we should all be prepared for a "new" normal.
2. BIC, BIC, BIC (Brazil, India and China). The new world economies of Brazil, India and China are at the forefront of the current worldwide recovery with estimated GDP growth of 9%, 8% and 5%, respectively. In contrast, North American GDP is anticipated to grow 2-2.5%. As these new world economies expand, so do the hospitality prospects within them. Both Starwood and Interstate Hotels and Resorts reported that they expect growth outside the United States to exceed growth within the United States. I suspect this is true for a number of the companies attending this year's conference. According to the chief economist for Scotiabank, the way to find those areas that will prosper and benefit most in this new economy is to simply follow the cash.
3. While occupancies are expected to continue to recover this next year as a result of the largest rebound in lodging demand ever measured, rate will continue to be a significant challenge. PKF forecasts increases of 4.6% and 7.0% in ADR for 2011 and 2012, respectively, and occupancies of 60.1% and 61.7% for the same periods.  Combined, these increases in ADR and occupancy are forecasted to result in REVPAR increases of 7.0% and 9.9% in 2011 and 2012, respectively.
4. Increases in rate over the past year (primarily in the fourth quarter of 2010), were born almost exclusively by the leisure segment. Both corporate and government travelers continued to exert downward pressure on rates last year and will likely continue to do so this year.
5. On a more micro level, the current recovery is being led by a small handful of markets, most notably New York, Washington D.C., Boston, Miami and San Francisco, the same markets that suffered some of the greatest declines. Seattle is not expected to return to long-term occupancy levels until 2012, with long-term ADR and REVPAR returning in 2013.
6. The debt markets (including CMBS) are thawing quickly, though construction financing remains nearly impossible to secure absent some unique long-standing relationship with a lender. The unavailability of new construction financing should keep supply growth in check until 2013-2014.
7. The public REITs will continue to dominate the acquisition headlines in most major markets for the next 6-9 months while REITs continue to enjoy the benefits of their public currency. In the interim, private equity will be forced to look to secondary and tertiary markets for investment opportunities.
8. Notwithstanding the dedication of at least 7 breakout sessions to distressed hotel assets, the tidal wave of distressed (translated: cheap, lender- owned hotels) is not coming. While several speakers expected the number of lender-driven transactions to increase over last year's levels, lenders' often-criticized "extend and pretend" approach to their distressed hotel loan portfolio appears to have enjoyed a measurable level of success.
9. The proliferation of new, and growth of existing, third-party management companies has underscored the need for some kind of differentiation among the competing operators. During one presentation that featured representatives from 6 of the largest and most successful third-party management companies, it was nearly impossible to distinguish one company from the other.
10. The Northwest -- and Seattle in particular -- received an unusual amount of attention at this year’s Conference as a result of Red Lion's recent listing of its downtown Seattle flagship. Good luck Chris and Matt with all those property tours.

If paid attendance at this year's Conference is any indication of the future health of the industry, we all have much to look forward to in the upcoming year; attendance was up 11% over last year's meeting.

If you have specific questions about this year's Conference, the topics covered or my comments, please drop me a line.  Otherwise, I'll look forward to seeing many of you at next year's conference when it returns to the City of Angels on January 23 - 25, 2012.