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Industry Outlook -- SERVICES


Nothing like a booming economy to raise the price of that mint under your pillow. Buoyed by strong demand and a shortage of new hotels, room rates in the last two years shot up 12.7%, to an average of $74.50. That should drive up 1997 hotel profits 17% over those of 1996, to $14.6 billion.

But what the economy gives, it can quickly take away--especially in an industry where new supply comes in waves and leases roll over by the night. When Asia's recent stall raised questions about the strength of U.S. consumer demand, the 140,000 new rooms coming on line in 1998 seemed less necessary. U.S. occupancy rates dropped for the first time this decade, from 65.1% to 64.5% in 1997, and in 1998 they will slip more, predicts Bjorn Hanson of Coopers & Lybrand.

A boost in new construction will increase the supply of rooms in 1998 by 3.4%, according to Smith Travel Research, while demand will grow by only 2.6%. It's hardly a prelude to a bloodbath similar to the 1986-92 period, when hotels cumulatively lost $14 billion. The average breakeven occupancy rate has fallen to 55%, vs. 65% in 1990. And hotels still intend to hike rates 5.3% this year, although profit growth will slow, according to Hanson's estimates.

"BEST OF TIMES." Still, for the players who own hotels in the budget, midprice, and extended-stay sectors, the pain could be considerable. Red Roof Inns Inc. and La Quinta Inns Inc. are already struggling. With its exposure to Asia, ritzy Four Seasons Hotels Inc. may also run into trouble. The one bright spot is big full-service properties in major gateway cities such as New York. "For our hotels, these are the best of times, and it will continue," insists Hilton Hotels Corp. CEO Stephen F. Bollenbach (box).

In Las Vegas, even the luxury end is cooling. A wave of construction in Las Vegas, where 7,200 rooms were added in 1997 alone, has slowed growth. And there's more to come--at midyear, Mirage Resorts Inc. will open its $1.6 billion, 3,000-room Bellagio hotel and casino.

The swarm of takeovers that reshaped the industry in 1997 isn't likely to be repeated on the same scale. A total of $43 billion in deals were signed last year, including the acquisitions of the Westin, Wyndham, and ITT Sheraton chains. Starwood Lodging Trust Corp. and Patriot American Hospitality, real estate investment trusts with a structure that gives them the tax advantages of a REIT but the flexibility to own and manage hotels, used their inflated stock to become giants. But with the biggest chains taken and acquisitions getting pricey, deals will be far less eye-catching. Among those who could still find new owners are CapStar Hotel Co. and Prime Hospitality Inc., says Mark Mutkoski of BT/Alex Brown Inc.

Meanwhile, Asia is a wild card for all these mergers. If the crisis has a greater impact on the U.S. economy than estimated, there could be some quiet check-in desks.By Kathleen Morris in Los AngelesReturn to top


Prognosis 1998


-- Average room rates are expected to rise another 5.3% in 1998

-- Room shortages continue in many upscale hotels

-- Restructuring has driven breakeven ratios to record lows


-- Overdevelopment is hitting budget, midprice, and extended-stay hotels

-- Buying frenzy will drive up acquisition prices and make deals less attractive

-- Occupancy levels in many regions are decliningReturn to top

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