Supply Growth To Increase But At Slower Pace

NEW YORK? Because of early capital market intervention, the lodging industry ?averted a 1980s-style meltdown? and will ?land softly? in 1999, according to a recent report by Bear, Stearns & Co. In the company?s March 15 ?Equity Research Lodging Industry Intelligence Briefing,? a 13.5% decrease in the total number of new room openings is projected for 1999 over last year?s levels. But despite the decrease, RevPAR and profitability growth will be positive, resulting in increased stock valuations throughout the industry. And supply should grow by 3.5%. ?There will be a soft landing because we are just not seeing the 1980s-style overbuilding in this cycle,? said Jason Ader, senior managing director at Bear Stearns. The expected number of newly built rooms will be 129,432 for 1999, according to the report. There were 149,597 newly constructed rooms that opened in 1998. The full-service segment will experience an increase of 24% over last year, which is mostly driven by a 126% increase in the luxury sector. The midscale with f&b sector will decrease by 19.3%, and the upscale sector is expected to drop by 3.9%. However, the projected increase in openings in the full-service market ?represent only a 2.1% increase in the sector?s supply during the year,? according to the report. New Room Openings Down Limited service and extended stay sectors will see ?substantially fewer rooms? opening in 1999, according to Ader. Limited-service openings will reach 52,866 rooms this year, which is a 19.2% decrease over last year. The projected decrease is led by a drop in the number of new room openings in the midscale without f&b sector of the market. Meanwhile, the budget sector is expected to see a 19.1% drop in newly opened rooms for the year as well as a 8.9% decrease in the economy segment. The extended-stay sector will experience the most dramatic decrease in new room openings, according to the report. The total number of new room openings in the sector is projected at 31,592, a 34.8% decrease over 1998. But it?s important to note that the decrease is fueled by a 44.3% decrease in new room openings in the lower-tier end of the extended-stay sector. The upper-tier end of the sector will enjoy a 6.1% increase in the number of new room openings. Decreases in the extended-stay sector are driven by the capital market. ?The major [extended-stay] companies have curtailed their plans,? Ader explained. ?And more importantly, the availability of capital is much more limited.? But the impact on supply of these projected decreases across the segments translates to slowed levels of growth. Supply will grow by 3.5% in 1999. Still, profitability should be positive. More Discipline It?s because the industry experienced more internal and external discipline then during the 1980s, Ader said. The 1980s was marked by easy capital and development-friendly tax laws that triggered ?unsound development of highly leveraged high-interest rate carrying hotel development,? according to the report. Demand couldn?t keep up. Average daily rate growth dropped and the industry suffered. The current cycle will be softer, Ader said, because financing was conservative, interest rates stayed low and productivity improved. Moreover, supply growth never outpaced demand growth. For 1999, Bear Stearns expects most hotel owners to benefit from decreased construction activity. Additionally, Bear Stearns is expecting industry RevPAR growth to ?reverse itself before it turns negative.? For big players in city center markets, that means that the threat from competition will ?remain minimal.? But the limited-service segment, especially the hotel companies who thrive on unit growth, will face challenges in an industry with slowed supply growth, according to the report. In this climate, the stronger brands will do best.