Will the EESA stabilize the industry?

Although many people view the Emergency Economic Stabilization Act of 2008 as a bailout for Wall Street, its effects will be widespread and likely will directly affect the hotel industry, according to faculty from the Preston Robert Tisch Center for Hospitality, Tourism, and Sports Management at New York University. Three faculty members—Bjorn Hanson, Frederic B. Mayo and Donna Quadri-Felitti—were panelists on a podcast released today titled "The Emergency Economic Stabilization Act of 2008 and Its Effect on the Lodging Industry." (To listen to the podcast in full, click here.)

The EESA was enacted on Oct. 3 in response to the meltdown of Wall Street financial institutions. The act was divided into three sections: the Emergency Economic Stabilization Act, the Energy Improvement and Extension Act of 2008 and the Tax Extenders and Alternative Minimum Tax Relief Act. The first section, with its 43 provisions, was the main driver of the podcast and will have the largest effect on the lodging industry. (To download a summary of each of the 43 points, as well as other information, click here.)

"It is one of the most far-reaching interventions in the last 70 years and certainly the most broad-reaching in this century," said Mayo, clinical professor at the Tisch Center.

"There are no specific provisions in the act that relate directly to lodging or the travel industry, but the act will create investment opportunities for our industries," Hanson, clinical associate professor at NYU Tisch Center, said. "As the government acquires troubled assets in the form of mortgages and related instruments, there will be hotel mortgages in the pool." Because of the act's provisions, commercial mortgages—including those for hotels and travel-related businesses—issued before March 14, 2008, are eligible for acquisition.

"The nature of this act and its administration indicate that there may be some important opportunities to purchase mortgages with positive underlying value, purchase mortgages that are returning positive returns relative to the price paid to acquire the mortgages, purchase mortgages and foreclose as an approach to gaining ownership, or to purchase mortgages for resale based on repackaging or waiting for more favorable market conditions," Hanson said. (Check the Treasury website for updates.)

Additionally, some of the money from the act, namely the first $250 billion, already has been injected into the market, said Quadri-Felitti, clinical assistant professor at the Tisch Center. "The initial phase of the $250-billion package is just now beginning to flow into the market. However, some immediate reactions to the actual signing of the legislation were noticeable. These include a surge in the U.S. dollar as foreign investors began buying U.S. treasury debt once the law passed. While the dollar had been recovering from its July ’08 historic low against the euro, since Oct. 1, it has gained approximately 13 percent and, for the year, 22 percent. A similar pattern of recovery is seen against the pound."

The strengthening of the U.S. dollar is bittersweet—although it signals a slight turnaround some time in the future, it also could harm cities that have become dependent on foreign travelers, such as New York, Los Angeles and Miami, Quadri-Felitti said. "Replacing the value of the long-haul foreign traveler is going to be challenging. Nearly every segment will see contractions," she said.

And in the rest of the country, it may not get much better any time soon, with consumer confidence at an all-time low of 38.0 and corporate travel in an emergency freeze state for some companies. "Owners will, in the short term, experience flattened profits and operators will be tested to implement creative ways to reduce expenses," Quadri-Felitti said. "Third-party distribution partners and all stakeholders will need to consider the value of every relationship as well as each relationship’s contribution to the fiscal health of the other."

But the act ultimately will be good for the industry and the economy as a hole, she said, noting it will bring liquidity to the market and has already eased the credit crunch, among other yet-unseen benefits. "This time, perhaps those with successful track records that span more than one cycle will be best situated to capitalize on the coming availability of hotel properties as well as the available debt and capital that will eventually be right-priced as the correction settles," Quadri-Felitti said.