April 17, 2016 - 12:21 AM EDT
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Drop in shale drilling puts some hotels on the market

April 17--Tejas Gosai says the "cowboys and Indians" experiment that launched when his Indian-American circle of family and friends invested in a quartet of hotels to capitalize on the oil and gas workers coming to the Pittsburgh region has been a happy pairing.

But now it's time for an amiable divorce. About eight months ago, Mr. Gosai started nudging his father, a Washington County physician and part owner of the hotels, to sell.

The occupancy rate at the Best Western on Gosai Road in Bentleyville -- a hotel that the family built in 2000 -- dropped from its all-time high in 2014 to a six-year low last year. The Holiday Inn Express down the road, on a street named after Mr. Gosai's mother and opened in 2009, got bruised as well. As did the Holiday Inn in Monroeville, a 2013 purchase.

"I knew the market would turn," he said. "I didn't think it would be this quick."

Mr. Gosai courted shale workers by offering boot washing stations for their dirty footwear, staggered housekeeping and multiple breakfast shifts for their round-the-clock schedules and Internet fast enough to accommodate dozens of PlayStation games played in tandem.

But when the $105.47 average room price at the Best Western in 2014 slid to $93.51 last year, he saw the writing on the wall.

He convinced his father and his business partners to start putting the hotels up for auction, in part because it would open the properties up to a wide buyer base including international interest that might not be plugged into the current drilling downturn.

The Monroeville Holiday Inn was listed earlier this month at a starting price of $4.5 million. The auction is slated for next week.

Mr. Gosai is hoping the Bentleyville hotels will fetch a combined $12 million, but the Holiday Inn Express, which was listed on TenX.com last week, starts the bidding at $1.5 million.

The Microtel in Chartiers Township, which was built in 2013, is "our recession-proof beast." Because of its modular design and low operating cost, it's still profitable at today's prices and won't be up for sale, he said.

"My plan is to see if these hotels go for what they should be sold for," Mr. Gosai said. "If they don't, we keep them and just scale down."

Good-bye free doughnuts and popcorn.

Riding the cycle

Oil and gas activity helped lift hotels after the most recent recession, said Steve Hennis, vice president of consulting and analytics with Tennessee-based STR Inc., which tracks the hospitality space. Areas where fracking was on the rise -- parts of Oklahoma, Texas, North Dakota and Pennsylvania -- were the first to give a boost to hospitality after 2008.

"For probably the past four to five years, North Dakota has seen more hotel development than any other area in the country," he said. "What was once a market where hotels were 50 percent occupied and room rates were perhaps $50 grew to 90-100 percent [occupied] and the room rates were astronomical -- $200 a night."

In many oil and gas rich areas, which tend to be remote and industrially homogenous, hotels that sprung up to service shale workers now stand without purpose.

Oil prices collapsed in the middle of 2014, plunging about 70 percent by 2015. The natural gas price dive preceded oil by a few years, but companies didn't start to significantly temper their drilling activity until last year.

"Occupancy has dropped to even below when this all started because there is so much more supply," Mr. Hennis said.

That's more true in places like Williamsport, the Lycoming County shale hub, than in Washington County. Although the latter has doubled the number of hotel rooms since 2009, it is home to a more diverse set of industries, including manufacturing, healthcare and construction.

In Williamsport -- population 30,000 -- half a dozen new hotels were built for shale gas workers. Where a few years ago, "every parking lot used to be full," now it's empty spaces as far as the eye can see, said Stacy Spencer, a business development specialist with Appellation Pre-Fab, a pipeline and fabrication company in Williamsport.

The local tourism bureau and chamber of commerce have been working for the past year to shore up hotel demand from other areas, she said.

"They just built a sports arena going after tourism," Ms. Spencer said.

Chasing the cycles

The hotel business is tied to cyclical industries. During the dot com boom of the late 1990s, the Bay Area in California filled up with new hotels that took years to recover after that bubble burst, Mr. Hennis said. Accommodations built for large sporting events, such as the Olympics, tend to follow the same path.

Mr. Hennis said hotel investors calibrate their expectations to such patterns.

"We've seen some of that for the oil boom, too -- investors knew that it was going to be somewhat of a short-term play," he said. "They made so much money early on they were already able to pay off their investments."

Typically, hotel investors expect to hold on to an asset for five or 10 years, he said. The opportunistic ones are now looking at oil and gas patches for fire-sale deals.

They may find them in southwestern Pennsylvania, Mr. Gosai said.

Mr. Gosai, whose identifier on the social media networking site LinkedIn is "shale businessman," still has interests in a handful of oil and gas related ventures, including a media company that runs shale-themed websites, a trucking school and a compressed natural gas station.

But last week, he accepted a position as a "hospitality ninja," a partner in charge of the hotel division of a new commercial financing venture. He says he was chosen for his ability to read the market and know when to say when.

"This is going to be awful in a year," he said. "This market is not going to bounce back. It's going to take at least seven or eight years.

"We overgrew in this market relying on an industry. A lot of people thought this was going to last 30 years. Those are foolish people."

Anya Litvak: [email protected] or 412-263-1455.

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Source: Equities.com News (April 17, 2016 - 12:21 AM EDT)

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