US 2009 lodging report Introduction Dear Colleagues, We are pleased to present the 2009 edition of Ernst & Young’s US Lodging Report. In this year’s report, we review the performance of lodging markets and segments throughout the US. As important, we focus on the global events and trends of the past year that are likely to affect the hospitality industry in 2009 and beyond. These include the turbulent global economy and financial markets, an emphasis on cost control, an increased focus on green technology and the increasing role of technology to promote the brand, generate customer demand and improve the bottom line. Please visit our website, www.ey.com/us/realestate, to read our other hospitality publications. Ernst & Young’s Hospitality Services professionals provide developers, lenders, owners and operators with an array of advisory services. Please feel free to contact us if we may be of service. Sincerely, Michael Fishbin National Director Hospitality & Leisure Ernst & Young LLP US 2009 lodging report i US 2009 lodging report 1 Top 10 thoughts 11 Global and US overview 12 Global perspectives 14 US industry overview 21 Chain segments 35 Market overviews 36 Atlanta 40 Boston 44 Chicago 48 Dallas 52 Fort Lauderdale 56 Hawaii 62 Las Vegas 68 Los Angeles 74 Manhattan 80 Miami 84 New Orleans 88 Orlando 92 Philadelphia 96 Phoenix 100 San Diego 104 San Francisco 110 Washington, D.C. 115 Hospitality contacts ii Ernst & Young’s Global Real Estate Center US 2009 lodging report iii Top 10 thoughts iv Ernst & Young’s Global Real Estate Center Credit crunch: capital waiting 1 on the sidelines The credit crunch, which began in the short-term. Hotel values are anticipated equity from third-party investors. US in mid-2007, has gradually turned to erode as capitalization rates increase, According to Ernst & Young and Globest. into a global economic crisis. While the with public real estate investment trust Com’s “Reality Check Survey” of nearly US and many European governments (REIT) stocks possibly indicating what 3,000 companies concerning the credit are considering alternative restructuring lies ahead for devaluation in the private crisis, conducted in October 2008, options for their financial systems, the sector. If fundamentals continue to “almost 60.0% of the investors polled hospitality industry is being significantly deteriorate, many highly levered hotels are defining themselves as net buyers impacted by the economic slowdown and could find it difficult to meet their debt to take advantage of fire-sale prices lack of capital. service obligations, resulting in some of commercial real estate.” In this lenders facing the risk of balloon defaults new ownership cycle, private equity The scarcity of capital has frozen the on construction and interim loans. and institutional investors — sovereign transaction market and is delaying Currently, some lenders are extending wealth and endowment funds — along new lodging supply. Many lenders are a “blanket” moratorium on real estate with traditional commercial banks, are waiting on the sidelines or extending loans to financially troubled borrowers. likely to be the prime sources of capital loans only to high-quality, cash-flowing for hotel investors following the collapse properties in strong markets, albeit at It is difficult to predict when the of the majority of large investment comparatively higher interest rates, financial markets will rebound, although stricter loan covenants, lower loan-to- value ratios and increased debt-service coverage ratios relative to the financing “ Almost 60.0% of the investors polled terms of the real estate boom between 2004 and 2007. As an example, are defining themselves as net buyers some lenders’ interest rates for mezzanine loans are as high as 20.0%. to take advantage of fire-sale prices of The majority of private equity and sovereign wealth funds, which were commercial real estate.” once viewed as alternative sources of capital, are waiting for further declines in asset prices or are investing the potential settling of the first banks. Numerous private equity firms domestically in debt instruments rather commercial real estate bankruptcy have raised an estimated US$400 than buying assets. cases through the first half of 2009 billion for distressed debt investments, may provide a good indication of which will most likely encounter a Given the reduction in liquidity bottom pricing. However, what appears new era of stringent underwriting in the market, revised downward certain is that cash-rich opportunistic standards requiring thorough financial RevPAR expectations, a virtually investors will be hunting for hotel deals due diligence with the assistance of non-existent transaction market and at discounted or distressed prices as independent subject matter experts and the perceived risk premium, there is a late buyers during the previous lodging trusted advisors. wide gap between sellers’ and buyers’ cycle, who may no longer have the expectations. This difference has resulted wherewithal to hold onto their assets, in fewer assets changing hands in the may be forced to sell or inject additional US 2009 lodging report 1 Enterprise excellence: focus on cost 2 containment and the bottom line As market conditions weaken, hotel and leasing, redeveloping existing space, owners and operators are concentrating repositioning to better serve the market on improving efficiencies, productivity and analyzing property-level budgets and cost savings in both capital and and forecasts. The relaxation of certain operating costs at the corporate and brand standards is also anticipated, with property level. Owners are increasingly a strong emphasis on flexible service concentrating on overhead cost levels to support each hotel operation in reduction, asset utilization yields, consideration of local market demands. operations, construction-cost efficiencies As a result of the uncertain economic and limited capital improvements. conditions and the decrease in demand Branding has also become a major focus forecast for the next year, owners are for hotel owners and operators, resulting acting quickly to increase profitability at in increased marketing and procurement the asset level. Current labor agreements effectiveness, particularly among brand limit the opportunities to reduce payroll conglomerates that leverage their costs, so owners will require more extensive network of owned and/or creative measures to reduce operational managed (or franchised) properties. expenses. Some of the areas in which Increasing the efficiency and integration they are achieving the most return of the corporate office structure is on their investment are implementing essential to controlling expenses. energy efficiency programs, outsourcing Aligning the corporate accounting business functions and monitoring department with property-level capital expenditures. Growth in asset accounting can eliminate the chance management services and operational of duplicating efforts. Technology has advisory is expected in 2009 as hotel come to the forefront, with companies owners approach asset managers to using document management align hotel operations with the current and other management systems. stage of the investment cycle. More and Additionally, business functions, such as more often, management companies are legal, purchasing and accounts payable, seeking independent reviews that shed are increasingly being outsourced to light on industry best practices from both third parties. an asset management and corporate management strategy perspective. Efficiency can be improved by allowing the owner and operator to work more closely together, effectively bridging the gap between the two parties. Value can be added by thinking about revenue management, driving ancillary revenue in areas such as audio/visual, parking 2 Ernst & Young’s Global Real Estate Center Technology: leveraging brand name 3 and the internet As the industry enters a period of the use of blogs, social networking sites economic slowdown, both branded and and travel websites like TripAdvisor, independent hotels will be utilizing the Yapta, Travel Muse and Concierge. The most up-to-date technology to capture user-generated content is important reservations directly through their own to travelers and has a strong influence distribution channels. At the same time, on booking decisions. Before booking hotel owners have begun to acknowledge a hotel stay, potential guests use the impact of third-party, web-based these online sources to research what distribution channels. others have to say about their stay, in terms of both the level of service and The wealth of information available to the accommodations. According to a consumers makes it easier for them Google study, 33.0% of travel website to research prospective hotels before readers changed their travel plans booking. According to the 2008 based on these reviews. Hotel owners National Leisure Travel Monitor, which are therefore implementing strategies summarizes a survey of 2,100 US to manage their online reputations and, leisure travelers, among leisure travelers ultimately, maintain their brand integrity. who have used internet travel or hotel websites to make a hotel reservation, At this turbulent time for the hotel approximately three-quarters have industry, companies are leveraging booked a hotel or resort online — a their brand names and technology to significantly higher proportion than differentiate themselves. Brand presence noted in 2007.1 As a result, independent in the virtual space will likely become an hotels