Hotel Occupancy Skid Highest in Bay Area

SAN FRANCISCO-According to a recent report released by Ernst & Young, San Francisco led the nation in the US hotel industry’s fall to the bottom of the market cycle following the Sept. 11 terrorist attacks. The industry’s dramatic decline was seen throughout the nation, with occupancies and revenues hitting this decade’s all-time low in many cases, says the report.

The hotel industry suffered a 37% drop nationwide. San Francisco, with only 42% of its rooms occupied, was in the lead, suffering a 55.4% drop in occupancy for the week ending Sept. 22. This figure is based on comparison with occupancy levels from a year ago.

With the exception of San Francisco, where significant room rate reductions were occurring way before the September 11 attack, most California hotels have not had to lower rates. Instead hotels have chose to maintain their average daily rates, according to Ernst & Young.

The industry, suffering from lower corporate and leisure travel levels, will continue to experience losses in revenue and reductions in occupancy rates. But all is not lost, according to a recent Jones Lang LaSalle Hotel report, which says that there are both risks and opportunities in this market change.

The Jones Lang LaSalle report says hotel stocks lost between 20% to 70% of their value in the week following Sept. 11, but industry forecasts place revenues per available room declines at only 10% for the remainder of the year. Hotel capital markets remain in a state of uncertainty.

“The question for hotel real estate investors is what this will do to hotel markets and investment performance,” says Melinda McKay, senior vice president of Jones Lang LaSalle Hotels. “The economy, travel and subsequently the hotel sector, will rebound when corporate America and consumers believe that decisive military action is being taken and that airline security systems are proving effective.”

According to Jones Lang LaSalle Hotels, hotel company values are immediately marked to market. Therefore, the recent treatment of the hotel stocks is likely to give the message to hotel owners that last year was a peak, which will result in the narrowing of the gap between ask and bid prices.

“The market is at an extremely challenging position, and what investors do now will be critical,” says Arthur Adler, managing director for the Americas of Jones Lang LaSalle Hotels. “Market uncertainty will be priced into hotel transactions in the form of higher discount rates. In addition, lower loan-to-value ratios and higher debt-service-coverage quotients will raise the overall cost of capital, further impacting pricing.”

The company says buyers with access to capital should seek to acquire well-priced hotel properties in diversified markets, as well as those in “drive-to” markets.