Despite how much the world has changed over the last year, this April feels a lot like last April.
Just like last spring, the economic outlook today is materially different than what the lodging industry underwrote coming into the year. In 2024, the anticipation of declining interest rates was met with the reality of stickier inflation. This spring, expectations of strong economic growth have been replaced with broad-based uncertainty, increased references to the “R-word” and, once again, sticky inflation. While we can hope the conditions somehow quickly revert to 2019, hope is not a strategy. My strategy in today’s world is to communicate.
The hotel business is capital-intensive. Maintaining and expanding funding channels is critical to every sponsor’s current and future success. While today’s outlook may be murky, good investors are not deterred. Whether they focus on equity or debt, investors are in the business of taking calculated risk. They evaluate market risk, asset risk and sponsor risk. I believe the latter is the most significant. This is a time for hotel owners to reduce sponsor risk and differentiate themselves to investors for the benefit of today and tomorrow.
Investors prefer working with sponsors who are transparent, and communicating is paramount during uncertain times. During my tenure as a private equity investor, I told portfolio company leaders to share bad news immediately rather than wait for a regularly scheduled meeting. Today, I offer the same advice to hotel owners: don’t wait to address risks. With the seemingly endless number of breaking news alerts, capital partners are already aware of the shifting economic winds. They want to hear if and how their investments are being affected, how they can help — they have a vested interest, after all — and who they can work with to capitalize on market dislocations.
Travelers spent over $350 billion at U.S. hotels in 2024, according to the American Hotel & Lodging Association. While hotels are big business, they are fundamentally a street-corner operation. National GDP and RevPAR forecasts are broadly publicized. Local market dynamics, however, are opaque. Investors want to know the conditions on your home field. Fill the information gap by offering your capital partners the current day reunderwrite of their investments — even if its qualitative.
Even in uncertain times, it's likely that most sponsors can share good news with investors. In today’s world, with the rise of construction costs, the feasibility of new developments has been significantly hampered. As a result, new competition that was previously planned to enter your market may not materialize. While industry prognosticators recently published downward revisions to 2025 RevPAR growth, the outlook may have remained unchanged in your market. Or maybe your market is set to experience a greater decline. Either way, filling the gaps between the broader news and the reality in your market will reduce surprises and enhance your credibility with capital partners. Sharing the actions you’re taking to mitigate asset-level risks further strengthens capital relationships.
Hotels are an operating business with numerous value drivers. While there is rarely glaring expense bloat in hotel profit-and-loss statements, several small savings across the middle of the statement can prevent value erosion and lead to sustainable value creation. I’ve been encouraged by certain brand families that are passing savings in loyalty reward expenses on to hotel owners. Management companies continuously work to tighten labor expenses. Hotel owners are strategically using furniture, fixtures and equipment reserves to reduce certain maintenance costs and address guest dissatisfaction. Investors observe how sponsors react to adverse operating environments. Show your investors you’re not sitting idle, that you’re finding ways to increase operating leverage. Even the slightest decreases in expenses will not only preserve cash flow today and enhance margins tomorrow, but they will also demonstrate your ability to more effectively sponsor your investors’ next hotel investments.
Today’s economic uncertainty will pass and a clearer positive growth path will emerge, as has been the case in the past. The current environment will also create tomorrow’s investment opportunities. Investors have been increasingly interested in hotel real estate. Those sponsors with access to that capital will seize the best deals. Sponsors that pose the least risk to investors are the ones who demonstrate — during today’s challenging times — that they are good stewards of capital by proactively communicating their market conditions and action plans. These sponsors are more likely to obtain investors’ assistance for existing assets and capital for tomorrow’s deals. Open those lines of communication. Talk to your investors about what’s happening to your assets. Show you are thoughtful, transparent and respectful of your investors’ capital. Reduce sponsor risk so investors feel comfortable working with you on your current portfolio and invest with you on the next deals. And remember, lenders are investors, too. They make up between 60% to 70% of your capital stack. Give them a call.
Ankur Shah is the chief financial officer of Access Point Financial, a $3 billion hotel-focused real estate credit firm.
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