Gradual relief may be in the future.

by admin

It’s been one long, uncomfortable summer for the Orlando hospitality industry. Unfortunately, there seems to be no relief in sight for hoteliers anytime soon.

At the beginning of 2009, the Orlando market had 438 hotels totaling approximately 111,700 rooms, a number that is second only to Las Vegas. Orlando will have added another 3,775 hotel rooms by the end of this year; during 2010, the area will introduce another 1,000 rooms. While some existing hotels are being closed permanently and others are just shut temporarily for renovation, it is hard not to believe that the Orlando market will be playing catch-up for many months in an effort to absorb this new supply.

The slide started late last year when occupancies stopped advancing after a 5-year climb. For year-end 2008, the Orlando market overall was down 3 percent in occupancy but up 3 percent in average daily rate (ADR), leaving revenue per available room (RevPAR) essentially unchanged during 2007. However, by the end of the first quarter of 2009, both occupancy and RevPAR dropped to their lowest levels since 2002. Occupancy was actually 2.8 percent below 2002 levels, and ADR was off almost 7 percent from the same period, making the first quarter of 2009 the worst first quarter in more than a decade.

While third quarter results are not yet in, both rate and occupancy have continued to fall through August. In the metro Orlando market, occupancy is down to 64 percent, nearly 10 percent less than last year, and at a rate of $95.54, which represents a decrease of roughly 12 percent. Consequently, Orlando now ranks eighth from the bottom of the top 25 major markets in RevPAR decline.

The drops in rate and occupancy this past year have put tremendous pressure on hoteliers, many of whom are now struggling to cover their debt service. Numerous properties are now under receivership. In fact, Orlando has been one of the hardest hit cities in the United States for distressed hotel assets. The area is mostly dependent upon leisure travelers and the convention traveler who is looking to combine business with pleasure. These also are two segments that have yet to show significant signs of improvement. With foreign travel off, particularly from Europe, the perfect storm is here.

While all seven submarkets of Orlando have shared the same fate, hotels in four of the submarkets — North, Downtown, East and West Kissimmee — are suffering greater losses due to year-to-date occupancies of less than 60 percent. Specifically, hotels in the once-busy submarkets of East and West Kissimmee are struggling to stay afloat. Some have shutdown altogether. These two submarkets, which Disney essentially created when the theme park opened in the 70s, have now fallen on hard times and at some point will cease to be a factor in the greater Orlando area’s economy.

In other submarkets, new hotel openings will exacerbate the problem. The newly opened 1,400-room Hilton at International Drive and the Peabody’s expansion of 700 rooms, which is expected to be complete in the fall of 2010, are trouble spots. Similarly, a new Hilton Hotel and a Waldorf Astoria are opening in the Bonnet Creek area adjacent to Disney World. These two hotels, with a combined room count of 1,500, may have a hard time finding clientele in the short term because luxury hotel occupancy is down across the nation. Even the wealthy are cutting back on travel.

Only the Lake Buena Vista submarket — those hotels just outside the Disney entrance along Apopka-Vineland Road — has been able to maintain a year-to-date occupancy level of more than 70 percent at 73.1 percent. However, even that figure is down from last year’s 81 percent occupancy. The average daily rate is down another 9.7 percent, which happens to be the smallest decline among the seven submarkets.

What should hotel owners and operators do to weather the storm? One of the most significant challenges to hoteliers is cutting expenses while maintaining a favorable guest experience. Hoteliers are finding that it can be done without guests perceiving a loss in service or value, but it is like walking a tightrope. Those with good, experienced staff will fare better than those not skilled in the business. As a result, hoteliers who can survive the recession will be in an even better position once the economy begins to recover.

— Dennis Reed is a senior vice president with The Plasencia Group.

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