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December 29, 2008

Downturn spurs hotel vacancies | A stalled economy sends hospitality managers scrambling for guests

Nationwide, the hospitality industry is bracing for one of its most severe recessions in 80 years, the effects of which are already being felt here in Maine.

PKF Hospitality Research, a national leader in industry research based in Atlanta, is projecting a 7.8% decline in revenue per available room in 2009, which is the fifth-largest annual decline on record since 1930. But in Maine, the drop has already begun, amplified by a disastrous performance in late summer. In September, lodging sales statewide dropped 12% over September 2007, according to data from the Maine State Planning Office.

Greg Dugal, executive director of the Maine Innkeepers Association in Freeport, called that drop “catastrophic” for Maine’s roughly 1,200 hotels. “When you’ve got a short season, everyone needs to make those six months,” he says. “Most people are going to be worse off this year than better off.”

That downward trend continued in October with a 2.6% drop over October 2007. So far this year, Maine’s lodging industry is just 0.7% above sales for 2007, with a little more than $600 million.

That’s bad news for an industry that has seen 6% or more in annual growth for the past three years, and more than 8.5% in 2007, said Dugal.

Many hotels and inns are preparing for a dismal 2009 as well. Cindy Mastrella, director of sales at the Spruce Point Inn in Boothbay Harbor, says the seasonal resort was outpacing 2007’s growth until March of this year, when bookings “slowed down to a snail’s pace.” She says she is “cautiously optimistic” the 104-room inn will be able to maintain its 2008 numbers into 2009, but is not projecting any significant growth. “We’re being very conservative.”

Despite these gloomy predictions, Maine could manage to escape the worst of the recession because of its more rural location and the cheaper rates that come along with that, says Reed Woodworth, vice president of PKF Consulting, parent company of PKF Hospitality Research.

“We’ve seen in past downturns that the local markets don’t necessarily do better than they would have in a strong market, but they do tend to weather the storm better than other markets,” Woodworth says. “The likelihood is that Maine won’t fare as worse as others.”

Caught between supply and demand

Since 2001, the hospitality industry has seen “double-digit growth” in revenue per available room, a boom fueled by a sound economy and at times a weak dollar that boosted international visitors to the United States, says Woodworth, who gave a presentation on the industry’s outlook at the Convention and Visitors Bureau of Greater Portland’s Maine Destination Day in November. This growth not only led to big increases in hotel rates, but a leap in new hotel construction as developers attempted to take advantage of the industry’s success. This increase in hotel room supply leading up to a recession is an “anomaly,” Woodworth says, as hotel supply usually drops off in the face of a downturn.

This glut of new hotels means that supply will continue to outpace demand and the recovery will likely be slow, according to Woodworth. PKF is projecting decreased hotel revenues through 2009, and doesn’t expect a turnaround until the second quarter of 2010. That’s the longest period of falling revenues since Smith Travel Research, another hospitality research firm, began tracking quarterly data in the late 1980s. “We are not expecting a whiplash effect, partly because of all the supply, which will temper the return on revenue growth,” Woodworth says.

Up until September, Maine’s hotels enjoyed a decent year of growth, thanks in part to a good ski season and the 2008 U.S. Youth Soccer Region 1 Championships held in June and July at locations throughout the state. But as the nation’s financial crisis deepened in September, consumer confidence took a dive and Maine’s hotels took a hit. “We had a great summer this year, and we really felt like, is this ever going to hit us?” says Melissa Robinson, director of sales at the Hilton Garden Inn in Freeport. “And then it did towards the end of the summer, and we felt it like anyone else.”

To weather the recession, Robinson says the 99-room hotel is stepping up its marketing budget and efforts, and booking events it normally would pass up. “A government event in the winter is great, but in the summertime in Freeport when we’re usually very busy, we wouldn’t have considered that before,” she says. “But we might not be that busy this summer. We’re just trying to stay open-minded.”

Maine could gain from the hotel industry’s troubles by luring more New Englanders who next year might decide to forgo a trip to Florida and instead stay closer to home, says Woodworth. Mastrella of the Spruce Point Inn says the hotel is also increasing its advertising budget in the hopes of attracting those regional travelers.

Maine can also benefit from the downturn by bringing more conventions and business events to the state, which can be a more affordable alternative for trade associations and other groups, says Kim Monaghan-Derrig, director of convention sales and events for the Convention and Visitors Bureau of Greater Portland. “Folks won’t stop having meetings,” she says. Though bookings for meetings and events in the Greater Portland area have not grown as much as they have in the past, they are holding steady through 2011, according to Monaghan-Derrig.

Dugal says he doesn’t expect any growth in Maine’s hospitality industry in 2009 — he just hopes it will break even with 2008. And Maine hoteliers are taking a similar approach. “We’re doing whatever we can to put heads in the beds,” says Hilton Garden Inn’s Robinson. “If it doesn’t turn out to be a great year for us, at least we know we did everything to have the opportunity to get there.”


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