PHOENIX—It took until the final session of the 20th annual Lodging Conference for hotel executives to identify some issues that could affect their bottom lines and abilities to grow their companies.
During a session titled “The power players in hospitality real estate (part II),” hotel owners and lenders said the rising cost of hotel construction and uncertainties regarding labor costs are two challenges they face.
“Construction costs are from a deal perspective the most difficult issue today,” said Walter Isenberg, president and CEO of Sage Hospitality. “It’s a combination of things. In what I call the depression years of 2008 and ’09 many contractors went out of business, and the jobs that came back first were in the energy field. A lot of skilled labor went to those jobs, and they’re not coming back because that sector is booming.”
He said Sage is involved in some development on a limited basis, mostly in urban markets, with some of the projects slated to be independent hotels.
He said the cost of construction and the reduced availability of contractors affect new development and redevelopment projects.
“And I’m not sure there is a long-term fix, which is another element that is slowing down supply growth in the hotel industry,” he said.
Jay Burnett, VP of real estate at JHM Hotels, said uncertainty over rising wage and benefit costs in a lot of markets has hampered the company’s ability to create operating models for potential new projects and properties it owns.
“In some markets, (governments) are considering or have already instituted $13 or $15 (per-hour minimum wages) laws, so we’ve been forced to put in ‘fudge factors’ on our projections because we don’t know for sure what our costs will be,” he said. “In these cases, uncertainty is not your friend.”
The executives said the debate over minimum wage is delicate from a political point of view, but higher wages could ultimately hurt hotel industry workers.
“We’ve always been an entry-level industry with clear career-path opportunities, but if the (minimum wage) number goes too high, those opportunities could get squashed,” said Jim Amorosia, president and CEO of G6 Hospitality.
Amorosia said the impact of the Affordable Care Act has so far been muted, but that could change.
“Perhaps users haven’t figured out what they need or what’s available,” he said. “2015 could turn out to be more interesting as people better understand their options under the law.”
Time to refinance
The speakers agreed the environment is conducive to refinancing hotel real estate, but it should be done prudently.
“It’s a great time to think about refinancing opportunities to lock in some long-term rates while there is a huge amount of capital available,” said David Harris, director of real estate investment banking at Deutsche Bank.
Isenberg said some owners got into trouble before the last downturn when they refinanced their properties.
“Today, there are generally bigger spreads between what you can sell for and what you can refinance (a hotel), and that’s a good thing,” he said. “I hope the spreads stay big because it’s not healthy over the long term to take proceeds (from a refinancing) because if there is another downturn you could be in trouble.”
Harris said that scenario is less likely since the credit rating agencies are much more conservative now.
“You need to be prudent about it and think what is the value of the hotel and what is the real replacement cost and how you will be able to survive if the downturn comes,” he said.
Riding the cycle
Burnett said executives at JHM remain on guard for changes in the hotel cycle.
“Cycles go up, and cycles go down, and we’re currently in a very enthusiastic part of the cycle, but we keep sight of the fact there will be a downturn at some point,” he said. “It could come from (over)supply or from other types of economic impact, but our focus is to manage toward those downsides.
“Location still matters; product quality matters; brands matter; so when we develop properties we make sure we’re No. 1, 2, or 3 in our comp set because that’s the best insulation against the next downturn.”
According to the panelists, the continuous availability of data and information has been both an opportunity and challenge for hotel investors.
“There seems to be constant crises around the world, which means a flight to safety by investors,” Harris said. “This has helped to keep rates low, which creates increased opportunities for borrowers.”
The rapid flow of news means hotel owners and operators need to be nimble and prepared for all possibilities, Isenberg said.
“Information moves so fast that it becomes a challenge, but at the same time it moves so fast that today’s story is tomorrow’s old news,” he said. “There will continue to be volatility, and we need to figure out how to survive through it.”