The southeastern hospitality industry has not been immune to factors creating havoc throughout the rest of the United States. From statistical data it is not easy to discern any uniform conclusions as to what is happening in the hotel market, although certain generalizations can be made. Overbuilt markets and those that have a higher dependency on airlines and resorts are suffering the most.

Between 1968 and 1988, 2.5 million new rooms were added to the lodging supply, according to Smith Travel Research. Comparatively, 3.5 million rooms were added to the lodging supply between 1998 and 2000. In other words, an average of 125,000 new rooms per year were added over a 20-year period versus an average of 1.75 million new rooms per year added in the recent 2-year period. Of all the statistics marking increased construction on new rooms, there is no more vivid picture of the overbuilt market in which hotel owners and operators find themselves today. Based on this statistic alone, one could argue that the hotel industry would have problems even without a national recession and the September 11 attack.

The national recession has been well documented by the financial press. The only remaining question is how long the recession will last and how deep it will go. There are two camps emerging: one argues that we have not reached the bottom and that we will be faced with a slow recovery, and the other believes we have reached the bottom and have already begun to recover.

Undoubtedly, the events of September 11 have had a profound impact on the hotel industry. The declines in occupancy, average daily rates and revenue per available room (RevPar) following the September 11 attack were dramatic in all markets. The recovery from September lows has varied. In Orlando, an overbuilt market that is dependent on air travel and resorts, occupancy in late September was down 45 percent from the previous year, according to a report by Ernst & Young Hospitality Advisory Services. In October, Orlando's occupancy was down only 25 percent versus October 2000. The same report showed that average daily room rates in late September were down 30 percent from the previous year, while rates were down only 5 percent in October 2001 versus October 2000. Consequently, RevPar was down almost 60 percent at the end of September compared to the previous year. By the end of October, RevPar was only down 30 percent from Orlando's October 2000 level.

By contrast, Charleston, South Carolina, another market greatly influenced by tourism, has experienced a relatively nominal impact. Steve Hilton, general manager of the Westin-Francis Marion Hotel in downtown Charleston, explains, "We felt an exorbitant impact in the 3 weeks following September 11, but when October's results were great, we felt it unnecessary to adjust our budget for 2002."

Jacki Renegar, director of the Center for Business Research in Charleston, also says things are coming back. "We are back to near-normal conditions for this time of year," she says, adding that occupancy rates for October were 70.4 percent compared to 72.8 percent in October 2000. "The average daily rate for the month was $114.52 in October compared with $115 the year before. By October, hotels had recovered from September 11," says Renegar.

Not all southeastern hotels have been affected by the national economic downturn; some isolated pockets have actually seen increases in business. Interestingly, hotel properties along the Interstate 95 corridor have shown a rise in occupancy associated with travel by car. Tourist markets that derive most of their guests from the drive-in market may actually be seeing an uptick in occupancies. For example, while Charleston saw a significant drop in occupancy during the month of September, the city reported an increase of .5 percent in October over occupancy for October 2000, which was a record month. November occupancy rates were similar to those of November 2000. As Ed Riggs of the Charleston Area Convention Center points out, "In large part, the rebound in the Charleston market has been driven by the fact that only 8 percent of our visitors arrive by airplane versus almost 86 percent arriving by automobile."

According to David Kalik, president of Charlestown Management Hotels (CMH), "The month of September scared us to death. The one positive thing to come out of the turmoil has been a renewed focus on making your guest the number one priority. Making his or her experience the very best it can be will go a long way toward ensuring top line revenues while meticulous attention to operating expenses will ensure a strong bottom line." Kalik's partner, Everett Smith, CEO of CMH, says, "Charleston, like other cities in the Southeast, has experienced its share of overbuilding that will take time to work through. Older properties in certain submarkets such as the airport corridor are suffering the greatest hardships."

Smith also notes, "While total market room revenues have increased from 20 million in 1989 to 52 million in 2001, the addition of 11 new hotels to this submarket since August of 1996 has resulted in an increase of 469,390 annual room nights, resulting in a significant oversupply of rooms. The market simply cannot absorb this dramatic increase in additional rooms." The 17 older hotel properties have seen dramatic declines in room revenues and occupancies over the last 24 months. The story being played out in this small submarket can be retold throughout the Southeast.

Although the hospitality industry in the Southeast is faced with a most challenging period, there will be tremendous opportunities for well-financed companies to expand through acquisitions of new properties and well-run management companies to add new properties to their portfolios.

Arthur H. Applegate is executive vice president of acquisitions and development for Charlestown Management Hotels in Charleston, South Carolina.


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