The following posts are quoted from WIWIH.com, the recognized authority site for hospitality industry information.
On November 16, 2008 Arun Sawhney in India wrote:
All posts to this topic were in the period Feb 24th to 28th. I did see this post then but didn’t take it very seriously then. Also, usually as we can see that in all the posts that Robert [Angelone] put up here, everybody was kind of feeling that things were not so bad and at worst it was the US economy which would take the hit. I guess we ought to evaluate today as to what Robert told us in February and also since he was right on target and that too based on sound evaluation of the economy on a global scale; we should re-open this topic and see how long and how severe this situation is for the globe as a whole. Also its effect on the hospitality industry viz new projects, tourist arrivals, lay-offs and other changes that it will bring about on a short-term as well as on a long-term basis.
Again hats off to you Robert. Excuse the delay because it took us a long time to appreciate and gauge the existence and extent of this situation.
This was posted February 24th, 2008 to WIWIH by Dr. Robert Angelone.
The economic conditions in the US at this time are quite serious. For the first time in more than 70 years, the US economy teeters on the brink of full scale depression. Despite all the successful measures taken during the Roosevelt era to prevent such a condition from happening again, no legislation, regulation or code can stop human greed and stupidity. If there’s any cause at all for this condition, it must be pared down to these. The reason for our present condition is principally the greed and excessive ambition of some in the banking and real estate industries who created an economic bubble around the most fundamental of our values: our real estate.
With the collapse of that economic bubble (as all bubbles eventually burst), the valuation of our property has decreased, or in fact, contracted to its original values before the bubble began to over-inflate those values. Now, with millions of mortgages based on the inflated numbers, our entire economy is in peril.
The current crisis is centered in the US today, but soon, this crisis will spread around the globe. You cannot have a global economy and not expect a crisis in one area to be isolated. All crises will affect the entire world. In this case, as the dollar weakens, it makes US productivity decrease, lowering exports and increasing the cost of manufacture. While this prompts more trade, it does little good if the cost of shipping the goods is excessively high due to inflated oil prices. Conversely, in an economic condition where credit is very tight and cash is in extremely short supply, the US consumer is not going to be inclined to buy the imported goods shipped here, particularly luxury goods. Hence, the crisis spreads back to those other countries as the market for their exports reduces substantially.
Another factor hurting other regions in a global economic crisis is the networking of banks. Today’s banks are not local, but global corporations, and when a bank in New York gets into trouble, it affects its branches in Los Angeles, London, Tokyo, Hong Kong, Paris, Istanbul and more. The potential today for a bank collapse on a world-wide scale clearly exists, and we may see in 2008 and 2009 several major banks simply go out of business.
The tightening of credit in the US is also likely to spread around the globe. This is what affects hospitality, and hotel design. In a tightened credit market, it becomes difficult, if not impossible for developers to find the credit necessary to develop new projects. We have already seen in Las Vegas, a $ 3 Billion deal affected by Deutsche Bank’s withdrawal from the project.
As consultants, we’re hearing more and more tales of projects that cannot get past the drawing boards because there are no banks willing to extend credit, and no venture capital or investor cash to make these projects viable. The real estate on which the hotel would have been developed is worth as much as 40% less than when it was purchased, only a year ago.
Restaurant startups are also at a dead crawl, as are other projects related to hospitality. Today, with many hotels being paired with condo operations, and there being a glut of residential property on the market and tight credit, residential sales are simply not happening. Many developers depended on those condo sales to amortize the construction loans, and revenues from maintenance fees to fund hotel operations.
As credit continues to tighten, as it will, and banks continue defaulting credit card accounts for no apparent reason, the amount of travel Americans will do moving forward for the next few years will subsequently decline, making the need for additional hotels far less than it was a few years ago, in an era of loose credit and abundant cash. Without travelers, we will see some hotels fail, starting with small business hotels and large destination resorts. Business hotels will suffer because companies are failing at an alarming rate, and have no funds to pay for travel where teleconferencing would suffice in place of the face-to-face meetings, and resorts because holiday travel will be far less of an option for people suffering from financial hard-times.
Overall, on a global scale, hospitality is in for a tough time for the next five years. The Economic Stimulus package is not going to provide Americans with enough funds to take a family vacation. And with dozens of overdue bills, its unlikely the recipients of those Stimulus funds will even be spending it on a lavish dinner at a restaurant.
Its a quirk of history, but the Great Depression did not start in 1929, as most are taught. In fact, what actually caused the Depression was the Smoot-Hawley Act, restricting international trade with tariffs. Today, the same effect is imposed on imported and exported goods with oil at $100 a barrel. Thus, speaking as an economist, and believe it or not, an optimistic one, I strongly believe the US and indeed the world, are heading for another catastrophic Depression that conservatively will last five years or more.
The future, no matter where you may be, is bleak, at best. Hang on, it’s going to be a bumpy ride.