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U.S. Lodging Horizon 2008U.S. Lodging Horizon 2008U.S. Lodging
Horizon 2008U.S. Lodging Horizon 2008”What Lies Ahead?”
E i F ti C tE i F ti C tEconomic Forecasting Center Economic
Forecasting Center Georgia State University
Wednesday, May 14, 2008
Mark Woodworth@pkfc [email protected]
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Presentation OutlinePresentation Outline
I. The Economy II Current Horizon:I. The Economy II Current
Horizon:II. Current Horizon:
Have We Seen this Before?III S Th ht t T k
II. Current Horizon: Have We Seen this Before?
III S Th ht t T kIII. Some Thoughts to Take-awayIII. Some
Thoughts to Take-away
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Question:Question:Question:Question:
Are we headed for aAre we headed for
aAre we headed for a Are we headed for a recession?recession?
Or just a healthy correction?Or just a healthy correction?
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Economy.com’s Current Outlook Economy.com’s Current Outlook
Drives our ForecastsDrives our ForecastsDrives our ForecastsDrives
our Forecasts90% Probability of a Recession90% Probability of a
Recession
10%
51% High Growth
Current: RecessionCurrent: Recession
Recession, Slow Recovery
Moderate Recession
Severe Recession
25%
Severe Recession
Source: Moody’s Economy.com4%
10%
Probability of Occurrence
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Much Happening in the Much Happening in the Much Happening in
the Much Happening in the National EconomyNational EconomyNational
EconomyNational Economy
I. Credit Crunch:• Stifles Consumer & Business Activity
I. Credit Crunch:• Stifles Consumer & Business Activity
II. High Oil Prices: • ‘Fuels’ Inflation; Impacts Travel
II. High Oil Prices: • ‘Fuels’ Inflation; Impacts TravelFuels
Inflation; Impacts Travel
III. Low Dollar ValuationHelps In Bound International Travel
Fuels Inflation; Impacts TravelIII. Low Dollar Valuation
Helps In Bound International Travel• Helps In-Bound
International Travel• Increases Exports, InflationInflation• Helps
In-Bound International Travel• Increases Exports,
InflationInflation
IV. Employment Growth SlowingIV. Employment Growth Slowing
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Consumers Continue to MakeConsumers Continue to Make
Basis-point change - share of retail dollar 2002 - 2007
Tough DecisionsTough Decisions
Building Materials
Nonstore
Gas Stations
Home furnishings
Electronics
Health and Personal
R t t
Sport, book & music
Clothing
Home furnishings
Autos
Grocery
Restaurants
-400 -300 -200 -100 0 100 200 300
Source: BOCGasoline + 26% from a year ago
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One of Six Leisure Travelers Plans One of Six Leisure Travelers
Plans to Take Fewer Trips This Yearto Take Fewer Trips This Yearto
Take Fewer Trips This Yearto Take Fewer Trips This Year
Not Because of Not Because of Time PovertyTime Poverty
Reasons For Taking Fewer Leisure Trips: 2007% 2008%Current
economic conditions make it difficult for me to travel 16 19Have
projects/things I need to do at home 22 15 †Have projects/things I
need to do at home 22 15 † Not able to get away from my
job/work/less vacation time 24 12 † The overall cost of
leisure travel is too high NA 12
There are other things I’d rather do with myThere are other
things I d rather do with myvacation/leisure time than travel NA
11
Price of gasoline is too high 5 9 † Air travel is too big
of a hassle 3 4Air travel is too big of a hassle 3 4I believe it is
not safe to travel 1 4 † † Denotes statistically significant
difference from prior year. NA Not asked in 2007.NA Not asked in
2007.
Source: YPartnership Leisure Travel Monitor
One Exception!
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20072007--2009 Economic Outlook2009 Economic
Outlook20072007--2009 Economic Outlook2009 Economic
OutlookExpectations Decline DramaticallyExpectations Decline
Dramatically
Forecast Point Employment Income GDP CPIPercent Change 2007 -
2008
October 2007 0.7% 2.6% 2.3% 0.2% January 2008 0.4% 1.4% 1.5%
2.7%
April 2008 0.2% 1.3% 1.5% 3.0%
Forecast Point Employment Income GDP CPIPercent Change 2008 -
2009
October 2007 1.1% 3.3% 0.3% 1.9% January 2008 0.9% 3.2% 3.4%
2.0%
Source: Moody’s Economy.com
April 2008 0.9% 3.1% 3.3% 2.0%
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InIn--Bound International TravelBound International
TravelFinally Back to PreFinally Back to Pre--2001 Levels2001
Levels
2001 2002 2003 2004 2005 2006 2007 2007:2000Total All Countries
-8.4% -7.1% -5.4% 11.8% 6.8% 3.8% 11.1% 10.7%
Inbound Travel to the United States
North America -0.7% -2.5% -5.2% 11.1% 6.8% 6.8% 11.7%
29.9%Overseas -15.9% -12.4% -5.7% 12.7% 6.7% 0.0% 10.3% -8.0%
Europe Western Europe -18.5% -9.5% 0.6% 12.2% 6.2% -2.1% 12.6%
-2.5%p Eastern Europe -8.8% -7.7% -2.9% 10.3% 13.9% 6.3% 11.5%
21.5%Asia -16.4% -9.9% -12.1% 16.0% 6.8% -0.7% 3.7% -15.6%Middle
East -8.3% -25.1% -7.3% 12.3% 5.0% 4.8% 12.1% -11.7%Africa -2.8%
-16.0% -2.1% 1.9% 4.8% 0.1% 10.0% -6.0%Oceania 19 8% 9 8% 0 8% 25
8% 11 7% 2 6% 10 2% 14 0%Oceania -19.8% -9.8% -0.8% 25.8% 11.7%
2.6% 10.2% 14.0%South America -14.0% -28.3% -16.1% 8.1% 10.6% 5.9%
18.0% -22.7%Central America -6.2% -8.7% -6.8% 5.4% 0.7% -0.3% 13.3%
-4.3%Caribbean -9.7% -12.4% -5.2% 9.7% 3.7% 5.6% 9.9% -1.1%
Sources: U.S. Department of Commerce, ITA, Office of Travel
& Tourism Industries;Statistics Canada (Canada); and Banco de
Mexico/Secretaria de Turismo (Mexico).
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InIn--Bound International TravelBound International TravelInIn
Bound International TravelBound International Travel
U S PORT OF ENTRY (ALL MODES) OF NON RESIDENT ARRIVALS
2007TOTAL % change
PORTS OVERSEAS 2007/2006 Rank Occ ADR RevPARGrand Total-All U S
23 892 277 10% -0 2% 5 9% 5 7%
Year End 2007/2006 Hotel Change
U.S. PORT OF ENTRY (ALL MODES) OF NON-RESIDENT ARRIVALS2007
Grand Total All U.S. 23,892,277 10% 0.2% 5.9% 5.7%NEW YORK, NY
3,806,028 16% 1 1.4% 11.2% 12.8%MIAMI, FL 2,847,413 13% 2 1.6%
10.7% 12.5%LOS ANGELES, CA 2,293,241 6% 3 -0.2% 7.4% 7.2%NEWARK, NJ
1,590,400 16% 4 3.2% 5.4% 8.7%HONOLULU, HI 1,456,381 -2% 5 -6.7%
6.6% -0.6%SAN FRANCISCO, CA 1,320,723 10% 6 3.0% 7.3% 10.5%CHICAGO,
IL 1,302,177 8% 7 -0.2% 5.8% 5.6%AGANA, GU 1,064,371 0% 8 N.A N.A
N.AATLANTA, GA 940,700 12% 9 -2.1% 4.9% 2.7%WASHINGTON, DC 774,556
15% 10 0.2% 5.2% 5.4%ORLANDO, FL 592,684 14% 11 0.0% 4.1%
4.2%BOSTON, MA 520,999 9% 12 1.8% 7.3% 9.2%DETROIT, MI 515,628 17%
13 2.3% 0.2% 2.5%HOUSTON, TX 496,792 14% 14 0.4% 8.6% 9.0%SANFORD
(Orlando), FL 444,496 -4% 15 0.0% 4.1% 4.2%S U S D t t f C ITA Offi
f T l & T i I d t iSource: U.S. Department of Commerce, ITA,
Office of Travel & Tourism Industries from the Summary of
International Travel to the U.S. (I-94) report. Smith Travel
Research.*Overseas includes all countries except Canada and
Mexico
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Where Are Cap Rates Going?Where Are Cap Rates Going?Where Are
Cap Rates Going?Where Are Cap Rates Going?
When Cash Flows
Decelerate
When Interest R t
Cap Rates Increase VolatilityTh hRates
IncreaseSo do Cap Rates
The more there is, the higher the
Cap Rate
Three Main Drivers of Cap Rate pChange
PKF Hospitality Research
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Forecasts of Return ComponentsForecasts of Return ComponentsC R
t M i UC R t M i U 190 b b 2010190 b b 2010Cap Rates Moving Up Cap
Rates Moving Up –– 190 bps by 2010190 bps by 2010
10 Year Treasury Treasury Spread Cap Rate % Δ NOI
2005 4.3% 5.0% 9.3% 15.5%
2006 4.8% 3.7% 8.5% 13.3%
2007 4.6% 2.9% 7.6% 7.2%00
2008F 4.1% 3.5% 7.5% 2.9%
2009F 5.4% 3.3% 8.6% 4.9%
2010F 5.6% 3.9% 9.5% 5.0%
PKF Hospitality Research, Moody’s Economy.com, RERC
LRA: 5.5% 4.8% 10.3% 4.7%
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Presentation OutlinePresentation Outline
I. The EconomyII Current Horizon:I. The EconomyII Current
Horizon:II. Current Horizon:
Have We Seen This Before?III S Th ht t T k
II. Current Horizon: Have We Seen This Before?
III S Th ht t T kIII. Some Thoughts to Take-awayIII. Some
Thoughts to Take-away
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HighHigh Supply Growth Preceded Last Two Supply Growth Preceded
Last Two DownturnsDownturns
HighHigh Supply Growth Preceded Last Two Supply Growth Preceded
Last Two DownturnsDownturns
6.0%
o tu so tu sNot This Time AroundNot This Time Around
o tu so tu sNot This Time AroundNot This Time Around
3 0%
4.0%
5.0%LRA Demand Δ: 1.9%
Forecast
1.0%
2.0%
3.0%
‐2.0%
‐1.0%
0.0%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
2002 2003 2004 2005 2006 2007 2008F2009F2010F
‐4.0%
‐3.0%
Supply Demand^
Source: PKF Hospitality Research, STR, BLS, Moody’s
Economy.com
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Historical ChangeHistorical Changein U S Lodging Demandin U S
Lodging Demand -- TroughTroughin U.S. Lodging Demand in U.S.
Lodging Demand TroughTrough
12 Month Moving Average12 Month Moving Average
4.0%
6.0%
March 2008
0 0%
2.0%
April 2007:
‐2.0%
0.0%1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43
45 47 49 51 53 55 57 59
November 1991:
‐6 0%
‐4.0%
April 2002:
‐6.0%
1989 ‐ 1994 1999 ‐ 2004 2004 ‐ 2009
Sources: PKF-HR, Smith Travel Research
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Historical Change in U.S. Lodging Historical Change in U.S.
Lodging DemandDemand –– A DoubleA Double--DipDipDemand Demand A
DoubleA Double DipDip12 Month Moving Average12 Month Moving
Average
6 0%
4.0%
6.0%
March 2008
April 2007 -
0 0%
2.0%
November 1991 - ‐2.0%
0.0%1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43
45 47 49 51 53 55 57 59
November 2008:
April 2002 -
‐6 0%
‐4.0%
Sources: PKF-HR, Smith Travel Research
‐6.0%
1989 ‐ 1994 1999 ‐ 2004 2004 ‐ 2009 Forecast
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The Mild DoubleThe Mild Double--Dip Extends RecoveryDip Extends
Recovery12 Month Moving Average12 Month Moving Average12 Month
Moving Average12 Month Moving Average
4.0%
6.0%
April 2007:
March 2008
0 0%
2.0%
‐2.0%
0.0%
1989
0119
8906
1989
1119
9004
1990
0919
9102
1991
0719
9112
1992
0519
9210
1993
0319
9308
1994
0119
9406
1994
1119
9504
1995
0919
9602
1996
0719
9612
1997
0519
9710
1998
0319
9808
1999
0119
9906
1999
1120
0004
2000
0920
0102
2001
0720
0112
2002
0520
0210
2003
0320
0308
2004
0120
0406
2004
1120
0504
2005
0920
0602
2006
0720
0612
2007
0520
0710
2008
0320
0808
2009
0120
0906
2009
11
November 1991: N b 2008 0 2%
‐6 0%
‐4.0%April 2002:
November 2008:
‐6.0%
Supply Demand
Sources: PKF-HR, Smith Travel Research
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The DoubleThe Double--Dip Extends a Dip Extends a
RecoveryRecovery
Supply Demand Occupancy ADR RevPARNovember 1991 2.1% -1.2% 62.0%
0.6% -2.7%+ 1 Year 1 1% 1 7% 62 4% 1 1% 1 8%
12 Month Moving Averages
+ 1 Year 1.1% 1.7% 62.4% 1.1% 1.8% + 2 Years 0.7% 2.1% 63.2%
2.4% 3.9%April 2002 2.1% -4.8% 58.9% -3.9% -10.4%+ 1 Year 1.4% 1.1%
58.6% 0.2% 0.0% 1 Year 1.4% 1.1% 58.6% 0.2% 0.0% + 2 Years 0.9%
2.6% 59.8% 1.0% 2.7%April 2007 0.5% -0.2% 63.1% 7.2% 6.5% + 1 Year
1.5% 1.2% 63.0% 5.7% 5.4% + 2 Years 2.6% 0.9% 61.6% 0.7%
-0.9%November 2008F 2.3% -0.3% 61.6% 2.8% 0.1% + 1 Year 2.7% 3.0%
61.8% 0.4% 0.7%+ 2 Years 2 7% 2 8% 61 8% 3 2% 3 2% + 2 Years 2.7%
2.8% 61.8% 3.2% 3.2%
Sources: PKF Hospitality Research; Smith Travel Research
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ADR ADR Growth Will ContinueGrowth Will ContinueADR ADR Growth
Will ContinueGrowth Will ContinueRevPAR RevPAR Performance
Performance up in 2009up in 2009
2008 = the Low Point Going Forward2008 = the Low Point Going
Forward
RevPAR RevPAR Performance Performance up in 2009up in 20092008 =
the Low Point Going Forward2008 = the Low Point Going Forward
Long Term
Average 2004 2005 2006 2007 2008P 2009P 2010P
= Below/Above Long Run Average
g
Supply 1.9% 0.4% -0.1% 0.2% 1.3% 2.5% 2.7% 2.3%
Demand 1 9% 4 0% 2 8% 0 5% 1 1% -0 1% 3 3% 2 5%Demand 1.9% 4.0%
2.8% 0.5% 1.1% -0.1% 3.3% 2.5%
Occupancy 62.8% 61.3% 63.1% 63.3% 63.1% 61.6% 62.0% 62.1%
ADR 3.5% 4.2% 5.5% 7.5% 6.0% 4.0% 3.4% 3.7%
RevPAR 3.5% 7.9% 8.5% 7.8% 5.7% 1.5% 4.0% 3.9%
Source: PKF Hospitality
Research, Smith Travel Research
2008 = (P) Preliminary Q2 2008
2008: 62.8%, 5.3%, 4.5% 2008: 62.2%, 4.7%, 3.0%
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Nominal Dollar Operating Profits*Nominal Dollar Operating
Profits*Still N t B k t 2000Still N t B k t 2000Still Not Back to
2000Still Not Back to 2000
$17,731 $18,887
$15 641$16,100
$16,886 $17,000
$21,000
$14,801
$13,172
$11 282$12,242
$13,676 $15,014
$15,641
$13,000
$17,000
mat
ed
mat
ed
$11,282
$9,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
2009
Estim
Estim
Dollars per Available RoomU.S. Trends
SampleNote: * Before capital reserve, debt service, rent, income taxes, depreciation, amortization.
Source: PKF Hospitality Research
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Operating Profits*Operating Profits*A Decade of No A Decade of
No RealReal GrowthGrowth
(2007 Constant Dollars)(2007 Constant Dollars)
$14 239$15,678
$14,590 $15,641 $15,631 $15,956
$18,000
$14,239
$12,636 $11,423
$10,007 $11,148
$12,875
$10 000
$14,000
ated
ated
$6,000
$10,000
Estim
Estim
$ ,1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
U.S. Trends Sample
Note: * Before capital reserve, debt service, rent, income
taxes, depreciation, amortization.
Source: PKF Hospitality Research
Dollars per Available Room
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Lodging SameLodging Same--Store SalesStore Sales
20.0%
NOI Stays Positive This Time AroundNOI Stays Positive This Time
Around
Forecast
10.0%
15.0%
Forecast Forecast
0.0%
5.0%
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
2000 2001 2002 2003 2004 2005 2006 2007 2008F2009F2010F
‐10.0%
‐5.0%
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
2000 2001 2002 2003 2004 2005 2006 2007 2008F2009F2010F
‐20.0%
‐15.0%
‐25.0%
Revenue Expenses NOI
Source: PKF Hospitality Research, STR,
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Real RevPAR Growth Real RevPAR Growth 90 Days Ago90 Days
Ago……Real RevPAR Growth Real RevPAR Growth 90 Days Ago90 Days
Ago……Forecast Change Forecast Change –– 20072007--20082008Forecast
Change Forecast Change –– 20072007--20082008
Top 5: Change
Anaheim
Oakland
Fort Lauderdale
Tucson
7.4%
7.3%
6.6%
6 4%Tucson
Richmond
Bottom 5:
6.4%
6.2%
Change
Fort Worth
Houston
San Antonio
Indianapolis
‐3.2%
‐2.6%
‐2.4%
‐1.1%Indianapolis
Jacksonville
1.1%
‐1.0%
RevPAR growing on par with CPI
RevPAR growing slower than CPI
RevPAR growing faster than CPI
PKF Hospitality Research, Moody’s Economy.com
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Real RevPAR Growth Real RevPAR Growth TodayToday……Real RevPAR
Growth Real RevPAR Growth TodayToday……Revised Forecast Change
Revised Forecast Change –– 20072007--20082008Revised Forecast
Change Revised Forecast Change –– 20072007--20082008
Top 5: Change
Salt Lake City
Austin
San Francisco
Fort Lauderdale
3.9%
3.7%
3.5%
3 3%Fort Lauderdale
Denver
Bottom 5:
3.3%
3.3%
Change
Fort Worth
San Antonio
Long Island
Jacksonville
‐5.4%
‐3.7%
‐2.9%
‐2.8%Jacksonville
Houston
2.8%
‐2.0%
RevPAR growing on par with CPI
RevPAR growing slower than CPI
RevPAR growing faster than CPI
PKF Hospitality Research, Moody’s Economy.com
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Historical ChangeHistorical Changeinin AtlantaAtlanta MSA
Lodging DemandMSA Lodging Demand
15 0%
in in AtlantaAtlanta MSA Lodging DemandMSA Lodging Demand12
Month Moving Average12 Month Moving Average
March 2008
10.0%
15.0%
5.0%
‐5.0%
0.0%
August 1991 - 1.0%July 2007 -
‐10.0%
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45
47 49 51 53 55 57 59 61 63 65 67 69 71
June 2002 -
1989‐1994 1999.10‐2005.9 2004.11‐2008.03
Sources: PKF-HR, Smith Travel Research
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Atlanta MSA Lodging DemandAtlanta MSA Lodging DemandA Second Dip
Has StartedA Second Dip Has Started
15 0%
A Second Dip Has StartedA Second Dip Has Started12 Month Moving
Average12 Month Moving Average
March 2008
10.0%
15.0%
5.0%
‐5.0%
0.0%
August 1991 - 1.0%July 2007 -
‐10.0%
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45
47 49 51 53 55 57 59 61 63 65 67 69 71
June 2002 - September 2008 – 1.9%
1989‐1994 1999.10‐2005.9 2004.11‐2008.03 2004:11‐2009:12
Sources: PKF-HR, Smith Travel Research
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AtlantaAtlanta--The Tale of Two RecessionsThe Tale of Two
RecessionsDemand Declines as Supply AcceleratesDemand Declines as
Supply Accelerates
ForecastForecast
Source: PKF Hospitality Research, STR
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AtlantaAtlanta--The Tale of Two RecessionsThe Tale of Two
RecessionsOccupancy Remains Above Previous TroughOccupancy Remains
Above Previous Trough
ForecastForecast
Long Run Average = 64.3%
Source: PKF Hospitality Research, STR
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Atlanta MSAAtlanta MSAAll HotelsAll Hotels 20082008All HotelsAll
Hotels-- 20082008
Weak Occupancy = Below Average Revenue GrowthWeak Occupancy =
Below Average Revenue Growth
2005 2006 2007 2008FLong-Term
Average
O 65 3% 64 9% 63 5% 62 0% 64 3%Occupancy 65.3% 64.9% 63.5% 62.0%
64.3%
% Change +7.8% -0.7% -2.1% -2.3% -
ADR $80 56 $88 41 $92 76 $95 26ADR $80.56 $88.41 $92.76 $95.26
-
% Change +5.6% +9.7% +4.9% +2.7% +2.6%
R PAR $52 63 $57 37 $58 92 $59 06RevPAR $52.63 $57.37 $58.92
$59.06 -
% Change +13.8% +9.0% +2.7% +0.2% +2.7%
Sources: Smith Travel Research, PKF Hospitality Research
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Presentation OutlinePresentation Outline
I. The EconomyII Current Horizon:I. The EconomyII Current
Horizon:II. Current Horizon:
Have We Seen This Before?III S Th ht t T k
II. Current Horizon: Have We Seen This Before?
III S Th ht t T kIII. Some Thoughts to Take-awayIII. Some
Thoughts to Take-away
-
Something to Take AwaySomething to Take Away
U S Economy Might be in a Recession But NotU.S. Economy Might be
in a Recession, But Not Hotels
Double Demand Dip This Cycle is Unique:p y q(1) High ADR’s (2)
Weak Economy
Trough of Current Downturn Q3 2008 (US + ATL)g ( )
Supply/Demand Imbalance Will Temper Recovery -2010
NOI Essentially Flat in 2008
Increasing Cap Rates Will Moderate AppreciationIncreasing Cap
Rates Will Moderate Appreciation for the Balance of the Decade
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For a copy of this presentationFor a copy of this presentationpy
ppy p
please contactplease contact
Claude VargoClaude Vargo(404) 842 1150 ext. 237(404) 842 1150
ext. 237( )( )
[email protected]@pkfc.com
33