The hotel industry is adding new rooms as the economy is weakening, and that could mean rates may grow more slowly than they have in the past.
The pipeline for additions and new construction is at an all-time high, according to Goldman Sachs analyst Steven E. Kent. He's concerned that soft demand and surging room supplies could weigh on profits as room rate growth slows.
Supply is expected to grow 2.2 percent to 2.8 percent in 2008, while demand is expected to grow just 1 percent, he says.
Host Hotels & Resorts Inc., Starwood Hotels & Resorts Worldwide Inc. and Choice Hotels International Inc. recently reported better-than-expected earnings, while Marriott International Inc. met estimates. Their shares gained on the news and have risen with the broader market since mid-April.
But Kent says the results were fueled by favorable foreign exchange rates, lower share counts as some hotel operators bought back stock, tax benefits and other one-time items.
He has a "cautious" outlook on the sector, saying corporate travel could slow as companies cut costs.
Oppenheimer analyst David Katz says he remains "cautiously optimistic" on companies with urban area exposure such as Starwood and Morgans Hotel Group despite fairly moderate growth in revenue per available room -- a metric that refers to the revenue-generating effectiveness of a hotel property.
So far, the weakest segment has been the economy segment, with negative RevPAR growth in the quarter-to-date period, Katz notes.
Since the start of the year, shares of Host, a real estate investment trust that operates hotels under various brand names including Marriott, Ritz Carlton and Four Seasons, are up nearly 5 percent. Starwood, which primarily operates luxury and upscale hotels and residences, has gained almost 14 percent.
Meanwhile, Choice Hotels, a franchisor whose brands include Comfort Inn, Quality Inn and Econo Lodge, has edged up less than 1 percent. Shares of Morgans, which owns and manages luxury boutique hotels, has fallen 30 percent.
Bobby Bowers, senior vice president of operations for Smith Travel Research, says consumers are spending less but business spending won't be hurt unless the slowdown deepens. The group forecasts 4.7 percent growth in room rates for 2008 versus 5.9 percent in 2007.