How is the Stimulus Bill Affecting
the U.S. Hotel Industry
A lot of scrutiny has surrounded the American Recovery and Reinvestment Act passed by Congress in 2009. But for U.S. limited-service and extended-stay hotels, the bill has had a measurable, if largely overlooked, effect.
October 5, 2010
The $787-billion American Recovery and Reinvestment Act, signed into law on February 17, 2009, was enacted to help the nation recover from the deepest recession since the 1920s. Among the initiatives funded by the bill were "shovel-ready" construction projects that could put people back to work in short order. The impact of this massive spending bill has yet to be fully measured; however, the hospitality industry has benefitted from this legislation in some obvious and not-so-obvious ways.
Effects of the Bill on U.S. Hotels
Highlights of the bill’s impact on the lodging industry include the funding of certain hotel projects that would otherwise have been left in the lurch, being unable to secure capital from private sources. Such is the case for the proposed Radisson Blu at the Mall of America. This 500-unit luxury hotel has been in the pipeline since mid-year 2007 and has been attached to several brands; however, financing for the project was scarce in the arid financial climate brought on by the recent recession. In August of 2010, Hennepin County officials granted the Bloomington Port Authority the power to issue $40.3 million in tax-free bonds to help finance the $130-million hotel. Hotel revenue will go towards repaying the bonds, a financing vehicle created by the 2009 economic stimulus bill. A similar project in Baltimore County Maryland is expected to utilize tax-free bonds to help fund the construction of a 105-unit Hampton Inn and Suites.
In order to find other evidence of the stimulus bill’s positive impact on the lodging industry, you have to investigate a bit deeper—specifically, demand trends in the economy and extended-stay segments of the hotel industry. In 2007, prior to the onset of the national recession, occupancy at a large percentage of economy extended-stay hotels exceeded 80%, with a majority of demand coming from construction crews associated with the housing and commercial construction boom. Many of these hotels suffered significant occupancy declines in 2008/09 as construction demand fell off in the absence of financing for residential and commercial real estate projects.
By 2009, in the wake of the sub-prime fiasco and the resulting adverse lending environment, data gathered for the same economy extended-stay hotel segment showed that many of these hotels had realized significant declines in revenue due to the loss of the construction crews. On many large construction projects of both buildings and roadway infrastructure, crews often utilize local hotels for weeks at a time in order to remain near the project site as well as restaurants and other amenities. Yet with new construction projects unable to secure financing and with many ongoing projects losing their financing due to collapsing banks, construction-related demand at these hotels fell severely.
Financing for new development is still relatively hard to secure from private financiers and banks in 2010. Yet stimulus-funded projects such as the construction, repair, or expansion of hospitals, major roadways, and universities, among others, has allowed for the return of construction crews to extended-stay hotels in many U.S. markets over the past six to twelve months. The return of the construction crews has allowed for many of these hotels to realize double-digit growth in demand starting in late 2009 and continuing into 2010. While average rates remain depressed due to smaller corporate budgets and increased competition among hotels, revenues are beginning to rebound. And as owners gain confidence in consistent, substantive levels of demand, rates are slowly following suit.
With rates increasing in the lower hotel tiers, many patrons who switched to these hotels have begun to return to higher-tiered properties in order to maximize their dollars. Meanwhile, the general economic recovery has begun to push demand back to upscale and luxury hotels, which were hardest hit during the recession. This two-pronged recovery has become apparent with demand levels at hotels recovering at a pace that exceeds expectations. Rate in many markets has also begun to recover as demand levels continue to increase.
Conclusion
The passing of the American Recovery and Reinvestment Act of 2009 has strengthened the base of blue-collar demand, whose lodging needs tend heavily toward the economy and extended-stay segments of the U.S. hospitality industry. The return of construction crews to these hotels also means the return of engineers, architects, and sales representatives for equipment and supplies to various mid-tier properties. This in turn helps increase participation in trade shows and conventions at large event-oriented, full-service hotels. So far, these "trickle-up" economics seem to be working in the hotel industry’s favor. Of course, the federal stimulus money will not last forever, and the question turns to whether private sources of capital will step in to fill the void so that demand levels stay on the rise and hotels up and down the chain scale can continue to recover.