Wobbly resort sector finds steady footing

The resorts sector hit a rough patch during the recession. Now, with the hotel industry firmly back on its feet and the overall U.S. economy humming, resorts appear back on solid ground. “The segment is doing better,” said Scott Berman, principal and industry leader, hospitality and leisure, PwC. “The healthier economic environment in the U.S. is giving leisure travelers more disposable income.”

Destination Hotels & Resorts’ business is predicated on the success of its resorts, which are interspersed among a total portfolio of more than 40 properties across the U.S. “Resorts are clearly returning to favor,” said Russ Urban, EVP of business development and acquisitions for Destination Hotels & Resorts. Meanwhile, Preferred Hotels & Resorts’ resorts portfolio has global reach, and Bob Van Ness, EVP of the Americas, Preferred Hotels & Resorts, is as optimistic as Urban. “The hotel segment is attractive and at this point in time, resorts are included,” he said.

Down for the Count
Resorts, not unexpectedly, were one of the hardest hotel segments hit by the “Great Recession.” Those tough economic times shook the confidence of leisure travelers and businesses, alike. The former tightened their belts as disposable incomes were pared down, leading consumers to either not take vacations, or to take more modest ones. As a result, “leisure travelers stayed away from resorts,” said Berman. Those who did go on vacation chose their destination, and the length of stay, carefully. “People were not taking the elaborate vacations they were taking before,” said Urban.  

The recession’s effect on group travel, meanwhile, has been two-pronged. First, companies not doing well financially as a result of the challenging economic environment started to pull back on discretionary expenses, which in many cases included resort bookings for groups. “Any groups that were on the cusp got pulled back in duration or in their entirety,” said Urban.

Then came President Barack Obama’s November 2009 speech reprimanding the banking industry for taking lavish trips to resorts. That speech, said Berman, resulted in a general perception among companies that booking events at such locations was inappropriate. “The AIG effect hit a lot of companies,” said Urban, referring to the company whose actions, by many accounts, precipitated the president’s admonishment.

The loss in both leisure and corporate/group travel debilitated the resort industry. Many resorts couldn’t cover debt service; some fell into bankruptcy. At the time, Berman said, “You could buy resorts in the U.S. for 50 cents on the dollar. They could be bought at a discount.”

Rousing Comeback
Like all things that are cyclical, and the hotel industry is surely this, things are far better now for resorts—and have been for a couple years.
Resorts were on the decline until 2013, according to Berman, “when we saw a measurable return of the business that was lost after Obama’s speech.”
He added that 2014 was strong as occupancy rates inched up along with room rates, bolstering RevPAR. “[Last year] was the year of the great surprise in the resort industry,” he said. 

The comeback of resorts is being fueled on two fronts. In the case of leisure travel, demand is being prompted by a number of factors. Berman pointed to a more robust U.S. economy that is giving consumers more confidence to spend money on discretionary items, such as travel. Van Ness cited intangibles as factors behind the strength in leisure travel. “Generating strong [consumer] demand [for resorts] are the many trends that indicate the desire for unique experiences and the ability to check something off of one’s ‘bucket list,’ which lends perfectly to the destination resort experience.” Also, said Van Ness, boosting consumer demand for resorts is the continued increase in multigenerational travel.

“The recovery started in earnest in 2012,” said Urban, “when leisure started coming back.” He added that, at that time, the recession had passed and, as a result, people were feeling better about their financial security. “That started a great trend, which continues today," he said.  A rosier economy and increased corporate confidence are behind stronger group travel. “What helped in both 2013 and 2014 was the robust economy and corporations feeling better about their fiscal position,” said Berman. “Corporate groups felt more confident, and the malaise created by the recession had passed.”  

Van Ness agreed. “Group business has come back,” he said, adding that this has happened in both the conference and incentive areas of the segment, which are “very important segments for resorts, as they generally [drive] strong results on softer, mid-week nights.”

The return of resort demand is also triggering a pickup in resort investment and transactions. Berman said that, because of the strength in resorts’ main markets, transactional activity in the segment has increased. After being “on sale” during the recession, he said, resorts have increased in value. “Some buyers are paying full value, if not more,” he said, explaining that they prefer to buy resorts with existing cash flow instead of building one, which is costly and complex. “The reason they’ll pay a premium is to know that there is cash coming in [immediately],” he said.

Recent resort acquisitions include Ashford Hospitality Trust’s purchase of the 168-room Lakeway Resort & Spa, in Austin, Texas, for $33.5 million; Loews Hotels & Resorts completing the acquisition of the 398-room Loews Ventana Canyon Resort, in Tucson, Ariz.; and Carey Watermark Investors’ buy of the Sanderling Resort, a 106-room full-service resort, located in Duck, N.C., for $38 million.

The resort business is also known for having high barriers of entry, a reason they are attractive to own, particularly, as Van Ness pointed out, by “institutional investors who don’t want competition coming in.”