The recession arrived late in the hotel market and is still deepening although the recession is ebbing in the overall economy. Smith Travel Research reports that April occupancy and room rates dropped about 10% from a last April which is almost a 20% dip in revenue per available room, a standard measure of hotel operating results. Many hotels no longer have operating profits. This reduces the asset value of hotels which eliminates the near term prospect of capital gains from selling hotel properties. This ugly situation for developers means further cuts in hotel project starts and more slowdowns or cancellations of projects already underway.

The combination of a cyclical peak in new room supply last year and a recession generated drop in room demand overwhelms the lingering impact of a still tight credit market for commercial real estate.

Hotels are now the weakest commercial market. Hotel owners will experience relatively larger cuts in net operating income and asset values than owners of other commercial buildings. This is not unusual. Hotel room demand is extremely cyclical, creating a boom-bust market in comparison to other commercial markets.

Hotel revenues as well as hotel project starts and construction spending held up relatively well in the early stages of the recession. This was partly because much of the already planned travel took place as planned. This included prepaid personal travel and business travel before the memos demanding expense cuts were issued late last year and early this year. The value of hotel construction starts continued at a high level through last November when starts topped $1Billion but have averaged less than half of that level since then. Jobsite construction spending for hotels was on the same timeline, dropping 23% from August to January. Developers stuck to their plans for expanding expensive destination hotel space until the worldwide recession forced an abrupt cutback.

The recent deep weakness in hotel room rentals is paralleled elsewhere in the hospitality industry. Airline passenger revenue miles are off about 7% year to date from last year. Theme parks have reported sharply lower attendance so far this year. Restaurant sales have been declining for almost a year.

Property & Portfolio Research projects 13% decline in occupancy rates and a 23% drop in revenue per available room by the time that the hotel recession ends about a year ahead. Hotel construction will continue to be depressed into 2011 before the room surplus is absorbed. Some properties will be converted to offices or condos.

Hotel starts will continue to slip lower fro two more years and will not return to the 2008 boom level for a further two years. However renovation of existing room will generate a modest rising trend in hotel job site construction spending in 2011.

The hotel recession will be most severe in market heavily dependent on fly in business and leisure travelers. Already, Smith Travel Research reports a 24-30% year over year drop in hotel room revenues in Chicago, New York, Boston, Phoenix, San Diego and Los Angeles.