Hotels, Casinos Brace for Slowing Economy

Monday, Feb. 11, 2008 4:26 p.m. EST

NEW YORK -- The travel industry is bracing for tough times.
The slowing U.S. economy threatens the once-booming hotel industry, while the credit crunch is hampering expansion plans.

"As the economy slows down, there is going to be slowing of activity by business travelers," Tim Behle, manager at Ernst & Young's transactions advisory services, told Reuters Television ahead of the Reuters Travel and Leisure Summit in Los Angeles, which begins on Monday.

"There is definitely going to be a noticeable impact on hotels in the U.S.," Behle said.

Similar trends are expected in the casino industry, which is dependent on conventions and meetings to fill seats at poker tables and slot machines.
"I think the industry is certainly going to be down when you add it all up in '08," Jim Murren, president of MGM Mirage (MGM.N: Quote, Profile, Research), told Reuters in a recent interview.

"There's no doubt that at the lower end of our business, we've seen some softening in occupancy, some reduction in spend," Murren said. "That's clearly a result of the economy."

Investors have been anticipating the slowdown. The Dow Jones U.S. Hotel index has fallen about 25 percent since hitting an all-time high in July.

Hotel companies have been scaling back expectations. Starwood Hotels & Resorts Worldwide Inc which operates the Sheraton chain, recently cut its 2008 earnings forecast because of the slowing economy.

WEAK GROWTH

The softening U.S. economy is expected to lead to the weakest growth in revenue per available room, or revpar — a measure of hotel performance that reflects rates and occupancy levels — in five years, according to Smith Travel Research.

The research firm is forecasting 2008 revpar growth of 4.4 percent, which would be almost half the peak growth rate of 8.5 percent in 2005 and the lowest since 0.5 percent in 2003.

Slowing room revenue could lead to weaker profits for hotel companies like Marriott International Inc, Starwood and Wyndham Worldwide Corp, if costs can't be cut enough.

On top of the slowing revenue growth, travel companies will struggle to finance hotel and casino building projects.

"The single biggest challenge that the hospitality industry is facing right now is actually the credit market," Behle said. The roughly 5,000 hotels in the development pipeline "for the most part are experiencing difficulties getting the financing that they need to actually start construction."

SILVER LINING

But supply growth is still expected to outpace demand for the second year in a row in 2008, according to Smith Travel, and stalled construction projects could help reverse this trend and allow existing properties to raise rates.

Also, U.S. economic woes have contributed to a weak dollar, which both keeps more Americans at home and attracts international tourists.

"The United States is on sale. Our hotel rooms are completely cheap by comparison to the rest of the world," Rick Swig, president of RSBA & Associates, a hotel consulting firm in San Francisco, told Reuters Television.

There are also signs that shares have reached a bottom.

Real estate mogul Sam Zell recently disclosed that he has accumulated a 7.7 percent stake in Starwood. His investment implied that, despite a slumping real estate market and a looming slowdown in travel demand, Starwood assets have more value than reflected in the current stock price.

"This is a pretty smart real estate guy," said Smedes Rose, an analyst with Keefe, Bruyette & Woods.

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