Riiiiing! Wake-Up Call for City Hotels

But you mention rates will flatten out; they’re not going to just drop.

If a lot of hotels panic, and start really cutting, then you’ll see it. But especially in this kind of environment, I’m not so sure that cutting rates is going to create any new demand. In these economic times, I think the kind of people that are going to travel are still going to travel. If the rate is $250 versus $300 [nightly], I don’t think it’s going to make much of a difference.

 
Will there ever be a point, given the increasing supply and shrinking demand, where the supply actually meets the demand?

Look, you’ve got to put this into perspective. In 2007, the city was effectively sold out, meaning everything full, 200 to 250 nights of the year. That pushed demand outward—we were sending business elsewhere. So, as you now have fewer full nights, some of that demand can come back in.

Now, do I foresee us dropping to occupancies below 70 percent? I don’t—barring a true depression, as distinct from a recession. Can we get down to 75 percent? Sure. That’s conceivable in a recession, especially with all these added rooms. But, at 75 percent, most of these hotels are still making significant profits. I think the actual break-even number is even mid to low 60s.

 
Even with the high cost of real estate?

Even with the high cost of real estate. Most of these hotels are not leveraged as high as they used to be. So there’s some cushion there. But, again, it’s easy to talk about macro-level results. You look at individual properties, there are some that are leveraged to the hilt.

 
Is there anyone brave enough, or just rich enough, to start a new hotel project amid this financial crisis?

I had a meeting Friday with a major player in the New York market—I can’t tell you who it was—talking about a new development. Now, it will be a three-year cycle before it would possibly be open, because it’s just in the conceptual stage. So, you know, there’s a life cycle. And one could argue—and this may be a little extreme—that now’s the time to start planning, so you’re opening into a stronger market. Of course, one could argue that you ought to buy stock today, too. [laughing] I’m not quite buying stock yet.

 
This gentleman you mentioned, is he an exception to what you are seeing, in terms of the overall vibe toward new development?

No, I’ve got two new builds. But where now I’m saying I’m working on two potential deals, a year ago I might have been working on five. I think there are still people looking at projects. Developers are the eternal optimists. It takes that eternal optimism to do a significant real estate development.

 
What about the financiers—are they optimistic?

I’ve got clients that come to me from financial institutions that say, ‘Hey, we’ve been approached with this loan application. What do you think about this site?’ A lot of what we do is for lenders asking for a third opinion of a project. I’m not doing too many of those for new loans right now.

 
Let’s say I’m a banker, and I financed a new hotel one year ago. Am I coming to you freaking out now that the numbers will be lower than we originally expected?

Not yet. You may next year. I listen to folks with the expectation that there are going to be a lot of deals in trouble. But I’m not seeing a lot of deals in trouble. Yet.

cshott@observer.com

Riiiiing! Wake-Up Call for City Hotels