With the fiscal cliff temporarily averted individuals and businesses can move into 2013 with a little more tax clarity, but not much. Most industry analysts agree that the deal struck in Congress, which extends unemployment insurance and several popular tax credits while raising rates on families with income above $450,000 and individuals earning more than $400,000, takes the threat of a recession off the table and puts an end to the uncertainty previously felt by most businesses. Although statistics demonstrate that the hotel industry is in for a year of moderate growth, the looming debates about federal spending cuts and the debt ceiling continue to remain a concern.
“The fiscal cliff deal is like taking aspirin when you really need antibiotics,” says Marlene Colucci, executive vice president of public policy for the American Hotel & Lodging Association (AH&LA). “It makes you feel better temporarily but doesn't really cure the problem. Hoteliers, like other business owners, need clarity on what the economic situation is going to be so they can plan budgets, hire people, and initiate projects.”
The deal does offer hoteliers immediate and tangible benefits, such as the reauthorization of the Work Opportunity Tax Credit (WOTC) through the end of 2013 and the renewal of bonus depreciation. The WOTC provides hotels that hire disabled and disadvantaged workers, youth, veterans, and other at-risk individuals with a tax credit, with a maximum range of between $2,400 and $9,600. Bonus depreciation allows hoteliers to immediately take deductions on purchases of capital equipment rather than depreciate them over a period of time. Fifty percent of what is spent for capital equipment can be expensed in the first year.
David Loeb, senior research analyst and managing director for Robert W. Baird & Co., says he expects RevPAR growth for 2013 to be similar or slightly higher than 2012, possibly ranging between 6 and 8 percent. But while the demand characteristics in the industry look strong, Loeb explains that further drawn-out debates from Congress could result in a lack of investment decisions.
“I think the fact that there was a decision will help demand in the next couple of months. But we’re still up ahead of another cliff,” he says. “I think there are going to be some businesses that begin to fret about whether to make investment decisions, and whether to send people out on the road or to trade shows.”
A lack of resolution from Congress could also impact the acquisition market. Following the announcement of the fiscal deal, the stock market surged, and Loeb expects prices will continue to rise over the next four to six weeks. But if economic uncertainty due to congressional debates about federal spending and budget cuts returns, it could have a direct impact on Real Estate Investment Trusts (REITs).
“I fear that if the political rhetoric gets nasty again, there could be more doubt raised about the future of the U.S. economy,” says Loeb. “That could lead to investors pulling capital out of hotel REITS, limiting their ability to raise new capital, to sell new shares, and to fund acquisitions.”
Bernard Baumohl, chief global economist at The Economic Outlook Group, has a more optimistic view of where the industry is headed in 2013. Baumohl says that spending on new hotels and hotel refurbishments is the fastest growing sector in commercial construction, and that private spending on the hotel industry is up 26 percent over last year. He believes that tax clarity will give hotels the green light to make capital investments and move ahead with development.
“I think all of the major metrics for travel, tourism, and hospitality in general are all pointing in the right direction,” he says. “The financing, whether from banks or private equity capital, is there to help increase the supply of rooms and also to spiff up the way hotels look. If that's an investment that banks and private equity investors are willing to make, it means they expect that there will be a nice return.”
How the fiscal deal will impact the travel and tourism industry remains unknown. Since payroll taxes will increase for nearly every working American, some analysts speculate that overall travel spending will decrease slightly, especially in the leisure market, since individuals will have less discretionary income.
“Basically, you have more people getting taxed and less money for people to take home,” says Colucci. “Are they going to spend more money, now that they have less to spend? That’s going to be the big question for travel and tourism and the hotel industry.”
The next few months will continue to be a bumpy road as the March deadline for the sequester approaches. Until policies regarding federal spending and budget cuts are settled, a level of uncertainty is likely to remain.
“I think most people would consider this deal a first step,” adds Colucci. “While you have elements that create certainty on the tax side, you still have two very large issues looming. People don’t really feel like the problem is resolved.”