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Hotel industry facing a new normal

In the hotel business, operators have typically banked on the stability offered by group bookings — reservations made well in advance of a convention or similar meeting for 50 or more travelers.

These bookings provide a safety net for hotels, helping them weather short-term fluctuations in travel patterns. But that cornerstone shattered when the recession hit, and some analysts fear it may never be repaired.

“That kind of travel really fell off a cliff hard and has not bounced back as quickly as other travel segments,” said Michael Bellisario, an analyst with Robert W. Baird & Co. “We keep waiting for that acceleration in growth and it’s just not happening. And I think the reason is that businesses are much more hesitant to spend that far in advance.”

Industry players are optimistic those days will return, Bellisario said, but they’re grappling with the possibility that group travel has structurally changed to reflect a new corporate cost-cutting mentality.

Gone are lavish, weeklong trips with two days to schmooze on the golf course, Bellisario said, replaced by shorter, more efficient conferences attended by fewer people.

It will likely take years to reach even 80 percent of the level of group bookings that existed in 2007, he estimated, adding that current numbers might be the new norm.

Other business travel — bookings for one or two nights made a few months in advance — also dropped off during the recession, but has returned in a big way, analysts said. Leisure travel has remained fairly steady, and now might even be growing.

Due to growth in those two areas, demand is spiking and hotels are filling again, analysts said.

“We’re very pleased with our company’s strong performance in 2012,” said Jon E. Bortz, chairman, president and chief executive officer of Bethesda-based Pebblebrook Hotel Trust. “This was a very good year for the overall hotel industry and our hotels benefited from the continued resurgence in business transient, leisure and international inbound travel.”

In addition to Pebblebrook, Maryland is home to several lodging real estate investment trusts (REITs), including Bethesda’s Host Hotels & Resorts Inc. — the nation’s largest.

Although the 2012 earnings statements of some of these REITs reveal moderate growth and potential for continued profits, analysts said those numbers don’t mean the industry is booming, in part because room prices have not returned to peak levels.

That’s because without advanced group bookings, hotel operators aren’t as confident in their occupancy rates, so they’re reluctant to raise room prices, Bellisario explained. The bottom line is that hotels maximize profits by raising rates, not boosting occupancy.

“You make a lot more money when you raise rates than when you put another person in a room,” Bellisario said. “You still have to pay housekeeping and take care of all those expenses. That’s why earnings aren’t growing as fast. If operators were more aggressive with raising prices, earnings would be much higher.”

The hotel industry’s performance in the past year hinges on other factors besides group bookings, analysts said. For instance, in a spillover effect from the recession, the construction of new hotels isn’t keeping up with demand for rooms, said Rod Petrik, an analyst with Stifel Nicolaus & Co.

“There’s very little supply growth because construction lending shut down in 2008, when banks ran into trouble and were not lending,” Petrik said. “… Then people weren’t traveling, and occupancy fell. So, when the industry is not doing well no one wants to invest in new hotels.”

There’s also the possibility of a negative impact from a generally sour economy, he said.

“Fear and greed move the market, and today, it’s fear,” Petrik said. “And you know, every day you go home from work and the news will be telling you, ‘Oh, the sequestration begins on Friday and they’re going to be laying off officials at small airports, and your lines are going to be 90 minutes to two hours.’ …If you’re barraged with that every morning and every evening, people are going to go, ‘Oh, I’m not going to travel,’ and, ‘Oh, I’m going to sell my travel-related stocks, including hotels.’ So, it’s the headline risk.”