Real Estate News Blog: Booking Bets on Hotel Luxury

BERLIN -- The global hotel industry is in panic mode as the effects of the U.S. credit crunch spread, high oil prices threaten to curtail travel and the broader economic outlook dims.

Just don't tell Horst Schulze, the former president and chief operating officer of Ritz-Carlton. The 68-year-old Mr. Schulze now runs hotel-management company West Paces Hotel Group, which was started by him and former Ritz-Carlton executives and operates the premier Capella brand.

Defying skeptics who warned that the market already was oversupplied, Mr. Schulze recently opened an ultraluxury hotel called the Breidenbacher Hof in Düsseldorf, Germany. Confident that the global boom in luxury hotels will continue, he plans to open seven more Capella-brand hotels around the world in the next 10 months.

"If there is a slowdown it isn't because the hotel and luxury business is slowing, but because the banks are reluctant to lend money," Mr. Schulze says.

The hotel industry has had a good run over the past decade. Operators and developers have reported years of bullish earnings, driven by surging emerging markets from St. Petersburg, Russia, to Shenzhen, China, and stable growth in the U.S. and Europe. But as the U.S.-led credit crunch ripples through Europe, leaner times could be on the horizon.

Through the first quarter, developers seemed to sense that the market was turning and rushed to begin any projects that had secured financing, according to data compiled by Lodging Econometrics, based in Portsmouth, N.H., which tracks hotel real estate world-wide.

During the first quarter, new hotel projects under construction peaked at 582. But at the same time, the number of new-project announcements dropped to 173 in the first quarter after peaking at 186 in the fourth quarter of 2007.

"The pipeline lags behind the economic cycle," says Patrick Ford, president of Lodging Econometrics. "There will be a peak in hotel openings in 2008 and 2009, but from 2010 through 2012 there will be a slowdown."

"Hoteliers are anxious about 2009," says Scott Berman, advisory partner at PricewaterhouseCoopers specializing in hospitality and leisure. "Commercial cities like New York, Paris and London are still performing quite well. But we can't ignore the comments from the airlines. If they really do cut back like they are saying -- as much as 20% in some markets -- that will have an impact."

Hoteliers in Europe haven't been affected by the weakening global economy until now. Through the end of May, average occupancy rates in the euro zone were 63%, essentially flat from a year earlier. Analysts estimate that hotel operators need about a 54% occupancy rate to break even.

The basic standard of measure in the industry is revenue per average room, or Revpar, which is derived by multiplying the occupancy rate by average pretax room rates. Despite signs that the euro-zone economy is cooling, Revpar was up 4.3% in May from a year earlier, says Pascal Bichon, associate director of HVS, a hotel consultancy and brokerage firm.

Still, weakening corporate earnings and higher fuel costs are expected to lead to a decline in business travelers, which will hurt hotels that depend on group tours, conventions and a steady flow of executives. Hoteliers appear about to get squeezed by a combination of falling demand for rooms and a large addition of supply as new hotels open just as Europe begins to feel the full brunt of the credit crunch.

The gloom don't seem to bother Mr. Schulze. Three months since its opening in May, the Breidenbacher Hof boasts an occupancy rate of about 65% with an average room rate of $490, Mr. Schulze says. And he is confident that the industry as a whole will weather whatever storm is on the horizon.

"There may be a slowdown in construction for two or three years, but that will just lead to a shortage of product," he says. "And that will drive up prices, and that will bring in new investors."