Friday, April 4, 2008

Weak U.S. Dollar Keeps Hospitality Sector Afloat

MBA (3/28/2008 ) Palaparty, Vijay
The weak U.S. dollar could be the primary factor for solid performance of the U.S. hospitality sector in 2008, said a New York-based Ernst & Young Global Real Estate Center report.

International inbound travel surged in 2007, resulting in a 6.1 percent increase in revenue per available room (RevPAR). This year can anticipate RevPAR of 4 percent, said Michael Fishbin, Ernst & Young's U.S. director of hospitality and leisure
"The continued weakness of the dollar is producing multiple beneficial effects on the U.S. hotel market which is likely to continue for the foreseeable future and which may pull the sector through current recessionary pressures," Fishbin said.

Canadian spending power has increased in addition to the euro, which strengthened from one euro per U.S. dollar to 0.66 euros per one U.S. dollar in recent months. The same exchange rate economics also benefit foreign business travelers who can leverage the strength of their home currencies to stay longer in U.S. hotels, Fishbin said.

Total arrivals in the U.S. witnessed 18 months of successive growth since April 2006, according to the U.S. Department of Commerce. In the first 11 months of 2007, international visitors spent $111.6 billion, up 13 percent from the first 11 months of 2006.

"As long as this exchange rate bonus exists for non-U.S. travelers, the benefits will be seen at hotels from ski resorts in Vail and Aspen to cruise ports such as San Diego, Seattle and Miami and traditional tourist and business destinations such as New York, Orlando and San Francisco," Fishbin said.

U.S. lodging performance was less robust in 2007 than 2006 when RevPAR was 7.6 percent, partly due to the credit crunch and overall economic uncertainty, the report said. Regardless, moderate increases in room supply, which slowed as the year progressed, yielded somewhat stable occupancy levels with moderate to strong gains in ADR.

"Last year, the hotel sector in this country showed solid gains in occupancy and average daily room rates," Fishbin said. "Looking forward, we see the continuation of a prolonged upward cycle that began two years ago."

The pipeline of new construction hit its peak in the fourth quarter of 2007, and with the economic slowdown and far tighter credit, some hotel construction projects slowed while others were shelved. A supply-demand imbalance is likely to benefit existing hotels and could result in higher room rates in cities such as New York, Miami and San Francisco.

Construction costs in 2006 skyrocketed while experiencing only moderate price increases in 2007 despite a 29.7 percent increase in the cost of diesel fuel, the report said. The increase in fuel price was balanced by a decrease in construction material costs such as gypsum and steel, which declined last year by 22 percent and 3.7 percent, respectively.

The report cited November 2007 data from Smith Travel Research, Hendersonville, Tenn., revealing estimated 2007 year-end occupancy at 63.2 percent, a 0.2 percentage point decrease from the same period in 2006. The overall industry’s estimated year-end ADR of approximately $104 represents a 6.4 percent increase over 2006. Overall RevPAR increased to $65 from $62.

“It is expected that overall occupancy will continue to decline slightly in 2008, with continued ADR gains,” the report said. “Occupancy is expected to decrease by 0.4 percentage points to 62.8 percent while ADR is anticipated to increase by 4.7 percent to approximately $108, resulting in a RevPAR increase of 4 percent to $68.”

The report also highlighted the continued influx of foreign capital into the sector as a result of wealthy international investors such as private equity, high-net-worth individuals and even sovereign funds. “In light of the recent credit crunch, the debt markets in the U.S. have significantly slowed, which has brought domestic hotel transaction activity by domestic investors to a minimum,” the report said. “However, heavily capitalized foreign investors and entities have benefited due to decreased competition for acquisition targets, as these transactions are less reliant on debt financing.”

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