Ernst and Young cautious on loding and development...But Manhattan's lodging market outperforms nation's.

While U.S. lodging fundamentals are generally strong, increasing economic trepidation may begin to affect lodging industry performance, as the Consumer Confidence Index has begun to soften due to high oil prices and a volatile/declining stock market according to Ernst & Young's 2001 National Lodging Forecast.

If corporate and leisure travel expenditures begin to moderate as a result, the impact on hotel occupancy levels would be partially tempered by a development pipeline already thinned by the tight capital markets, according to the Ernst & Young Forecast.

As the pace of business change increases, the lodging industry in 2001 will continue to confront new challenges in areas including, but not limited to, finance, development, marketing and operations.

"With the lodging industry enjoying one of its most productive years ever, and many per unit revenues and profits at historical peaks, traditional development theory postulates that financing for new development should be forthcoming to ease tight lodging markets," said Chase Burritt, national director of Ernst & Young's Hospitality Services Group. "However, several barriers have emerged that have affected the availability and cost of capital for both acquisitions of existing properties, as well as new development.

The perception that most hotel assets are performing at their peak, with modest growth potential, has created a widening perception gap of hotel asset values between buyer and seller, with buyers believing that hotel value has peaked and sellers believing that more optimistic current/prospective value should be reflected in asset pricing.

The financial community is taking an extremely cautious stance with respect to lodging investments, further inhibiting transaction activity. These dynamics have created a general impasse on many lodging industry transactions and developments, according to Ernst & Young's 2001 National Lodging Forecast.

SUPPLY AND DEMAND: Between 1997 and 2000, the U.S. lodging industry added approximately 411,459 rooms, representing an estimated cumulative growth of 11.6%. In 2001, industry supply growth is anticipated to increase by 2.3%, according to Ernst & Young's 2001 National Lodging Forecast, compared with an estimated 2.9% in 2000. The 2.3% increase represents the lowest growth since 1995, though concerns about new additions to supply are still warranted in certain markets.

According to Lodging Econometrics, 1,261 properties with a total of 139,064 rooms scheduled to be completed in 2001. Between 1997 and 2000, demand in the industry experienced a cumulative increase of 10.6%, with growth in 2000 estimated at 4%. In 2001, industry demand growth is anticipated to increase by approximately 2%, almost at the same pace as supply, as moderating economic growth tempers lodging demand.

OCCUPANCY: FLAT TO SLIGHTLY NEGATIVE: Between 1997 and 2000, occupancy in the industry ranged between a low of 63.2% in 1999 and a high of 64.5% in 1997, exhibiting a downward trend during the past three years. In 2000, occupancy for the U.S. Lodging Industry increased slightly, reaching 63.9%. In 2001, occupancy is anticipated to decrease slightly to 63.7% as a result of continued supply growth, according to Ernst & Young's 2001 National Lodging Forecast.

ADR (AVERAGE DAILY RATE) -- FLAT TO POSITIVE: Between 1997 and 2000, ADR in the industry ranged between a low of $74.76 in 1997 and an estimated high of $84.99 in 2000, increasing at a compound annual growth rate of 4.4%. Positive ADR growth is anticipated to continue in 2001, according to Ernst & Young's 2001 National Lodging Forecast, resulting in an ADR of approximately $88, an increase of 4% over 2000.

REVPAR (REVENUE PER AVAILABLE ROOM) -- FLAT TO POSITIVE: Between 1997 and 2000, RevPAR in the industry ranged between a low of $48.19 in 1997 and an anticipated high of $54.32 in 2000, exhibiting a consistent, upward trend during the past three years at a compound annual growth rate of 4.1%. In 2001, RevPAR growth is anticipated to moderate, according to Ernst & Young's 2001 National Lodging Forecast, with RevPAR increasing by 3.7%.

CONCLUSION: Although the lodging industry continues its nearly decade long streak of increasing revenues and profits, there is some disagreement among industry analysts about the industry's prospects in the near future, particularly with the recent rise of oil prices and the decline in the stock market. It is anticipated that in 2001 the lodging industry will continue to post relatively steady performance characteristics, with more modest overall RevPAR growth than 2000, according to Ernst & Young's 2001 National Lodging Forecast.

Profit growth in the industry should continue to exist, increasingly becoming a function of efficient expense management and process re-engineering, as well as some development. In 1999 and 2000, industry profits were estimated at $23 billion and $24.3 billion, respectively, and for 2001, profit levels are anticipated to increase to approximately $26 million, according to Ernst & Young's 2001 National Lodging Forecast.

While nationally the industry exhibits stable performance, there exist some local markets that are experiencing weaker supply and demand fundamentals. Of immediate concern are recent declines in the Consumer Confidence Index, as well as limited downward revisions of corporate earnings expectations and the effect though less evident on corporate travel expenditures.

According to Ernst & Young hospitality experts, other trends affecting the industry include the following:

THE INTERNET AND WEB ENABLEMENT: The Internet continues to create new opportunities for the lodging industry and to change the marketplace in innovative ways. On the revenue side, online travel information access and booking are likely to boost the overall amount of travel expenditures, but at the same time make the distribution landscape more complex. Relative to operations, hotel companies are now busy installing high-speed Internet access in guestrooms and are beginning to realize the marketing potential of such services. Online procurement/B2B networks are anticipated to generate cost efficiencies in areas such as purchasing, accounting, energy and repairs and maintenance. Lodging companies are teaming with service providers to improve profitability and to sell the promise of greater efficiencies to other companies. As web enablement technology advances, these efficiencies will become more tangible, according to Ernst & Young's 2001 National Lodging Forecast.

MANAGEMENT COMPANY SELECTION: Management company selection has become an increasingly important process in today's lodging industry environment. Encouraged by the Tax Act of 1981, significant hotel development occurred in the early 1980s, putting into place many management-friendly deals that were largely not performance based. Now, with many of these management deals up for review and more industry attention being paid to operating efficiencies through performance clauses as well as management now often times sharing in some of the ownership work a formal review of the options is becoming more important. Also, today's widespread public-private activity often requires a more structured management company selection process.

BRAND & CUSTOMER EXTENSION: Increasingly, services offered by lodging companies are overlapping with other real estate and service-oriented industries such as timeshare. This competency extension strategy has also created a more complex form of customer relationship management promoting lodging companies to measure consumers in terms of their lifetime value to their total brand portfolio.

ASSET MANAGEMENT: In the face of increasingly complex industry challenges, many individual and portfolio hotel owners are recognizing the value of independent professional asset managers that serve as a vital intelligence link between ownership and management. In addition to providing strong, innovative and profit-driven property management, professional asset management provides the potential for increased profit from operations, the convenience of a central, unbiased point of communication, and the creation of an independent strategic plan.

CONSOLIDATION: At least one or two international transactions are anticipated in 2001, according to Ernst & Young's 2001 National Lodging Forecast, as the difference between public stock values and asset values drive activity. The British company Bass PLC, which operates or franchises more than 2,900 hotels internationally under brands including Holiday Inn and Inter-Continental, could make a large hotel acquisition with the $3.8 billion of proceeds from the divestiture of its brewing business.

NEW PSYCHOGRAPHY OF ACING: The baby boom generation is investing more in service-oriented real estate. This "rentability" concept primarily refers to interests in real estate fully serviced by management companies and located within master planned leisure communities, allowing owners the ability to maintain an established lifestyle at their primary residence while minimizing the perceived risk of investing in a second single asset.