NEW YORK—The ongoing recovery of the U.S. hotel industry is bringing back much needed revenue for owners, but as demand improves and guest satisfaction scores drop, franchisees anxiously wait for hotel brand companies to reinstate paused standards and call for renovations.
The issue of delayed renovations and property-improvement plans arose several times during the NYU International Hospitality Industry Investment Conference, with owners expressing their concerns over having depleted their furniture, fixtures and equipment funds early on in the pandemic to make debt payments and from brand executives explaining that while they want to work with owners to control costs, these improvements will need to happen.
Brand Standards
Choice Hotels International President and CEO Pat Pacious said his company has gotten away from mandates and that flexibility will be something that stays. In markets where hotels need hot breakfast to be competitive, they should do it. If guests want grab-and-go options, hotels have to do that.
“What is the guest asking for in that market?” he asked. “Can the owner make money if they’re doing it that way? We have to get away from one size fits all and think about what works in individual markets and what works for the guest and the owner.”
IHG Hotels & Resorts is looking at flexibility while trying to keep brands to their intended promise, CEO of the Americas Elie Maalouf said. The InterContinental Hotel brand turns 75 this year, and Holiday Inn Express has reached 30 years with 3,000 open hotels.
“We do continue to evolve the brands, but part of that success has been keeping that promise,” he said.
IHG can adapt hotels to the local markets, but guests going to a Holiday Inn Express get a consistent experience, and that’s why the hotels are full, he said.
Every situation is different, said Kevin Jacobs, chief financial officer and president of global development at Hilton. People will invest where they think they can make returns and to protect future returns.
Everyone is trying to be flexible and to do the best they can, he said. In some cases, guests are paying rates that exceed 2019 levels, but they are not receiving 2019 levels of service. Like everything else in the industry, the solution is going to be collaborative. Hilton will work with owners to bring back service standards in a reasonable and rational way.
He said eventually owners will be required to completed deferred capital expenditures and renovations.
“And we’re going to work with our owners rationally and over time to get hotels back up to the product standard, because if we don’t, we’re just going to die a slow, painful death over the long term,” he said.
Most of Hilton’s owners are multi-unit owners, Jacobs said. Some may experience a proceeds gap and then a capital expenditure gap, which means they might have to sell hotels to fund the gaps. Owners will manage their portfolios, and Hilton will work with owners as they bring things back.
“At some point, we're going to say, just like we did with breakfast, ‘Hey all, time to bring hot breakfast back, that is best for the long-term value of the brand,’” he said. “And at some point, we're going to say, ‘Hey, time to bring service standards back then,’ and then at some point, we're going to say, ‘Hey, it's time to bring CapEx back.’”
Capital Expenditures
While all metrics for the industry remain positive, there continues to be a looming structural crisis, Noble Investment Group CEO Mit Shah said.
“For a better part of two years, there has been no CapEx spent at the vast majority of hotels,” he said.
Brands allowed owners to use their furniture, fixtures and equipment reserves, and there were many hotels that weren’t renovated before the pandemic began, he said. Now those hotels have seen a lot of wear and tear from the increased leisure demand over the last 19 months. That means guests will have poor experiences in hotels where owners didn’t have enough capital to invest.
“This is a real structural problem, and nobody has an answer,” he said.
The two biggest questions JLL receives from hotel investors are about labor costs and capital expenditures, said Gilda Perez-Alvarado, global CEO of JLL Hotels & Hospitality. There are discussions about which projects have a true return on investment and what is guest-facing, but what hoteliers need to do behind the walls can be extremely expensive.
“In terms of the pipeline that we’re seeing for next year, a lot of it is stress situations where maybe the capital requirement is too expensive with the headwinds from operating in labor-complicated markets,” she said.
That may mean for some owners that it’s time to sell, but the good news is that owners have had time to come to terms with hotel valuations.
Michael Medzigian, chairman, CEO and director at Watermark Lodging Trust, said he’s seen downturns in the industry since 1981, and every time the industry comes out under-renovated.
“This is much worse,” he said.
Owners have never raided their furniture, fixtures and equipment funds in past down cycles, he said. While Medzigian considers his company lucky in that it had renovated 90% of its hotels over the last five years, the renovation issue is going to stay with the industry for a long time with no easy solution.