Even before the onset of the ongoing COVID-19 pandemic, the hotel industry was undergoing something of a reckoning, said Noble Investment Group Senior Managing Principal and CEO Mit Shah.
With operating costs rising and revenues flat, he said, it was important for hotel investors to recognize not all brands, segments and markets were as poised for success going forward, and that knowledge was driving strategic discussions.
“I think most of us knew there were going to be winners and losers, and for the first time we thought about market research in a new way,” he said, speaking during the “A Focus on the Americas” panel during the online American Lodging Investment Summit Winter Update conference.
Now, with the industry in the depths of the deepest downturn on record, that has only grown to be truer. However, Shah remains optimistic about the hotel industry’s long-term prospects.
“I think in sometime in the second half of this year, we are going to begin the longest economic cycle in our history, and greater than 2010 to 2019,” he said. “But it’s going to be different for our industry.”
One of the earliest questions on how that will shake out is whether the U.S. will remain the headline on the “winners” list when it comes to international investment, with moderator Gilda Perez-Alvarado, CEO of JLL Hotels & Hospitality, Americas, and head of the group's Global Hotel Desk, pointing out that China assumed the crown as the country with the largest foreign direct investment in 2020.
Cody Bradshaw, managing director and global head of hotel asset management for Starwood Capital Group, said the U.S. remains too attractive of a destination for investors for it to fall from the pinnacle.
“It’s an incredibly large, diverse and sophisticated market with tremendous efficiency, transparency and liquidity compared to most other regions,” he said. “Simply put, the U.S. is a well-oiled machine that can generate a ton of deal flow throughout the cycle.”
He said the U.S. continues to have a diversity of secondary markets not seen in other regions, which “gives institutional hotel investors a bigger pond to fish from.”
The more efficient structure for deals will put it ahead of regions like Europe where things are inherently more complicated in terms of making deals in a post-COVID era, Bradshaw said.
“I think in Europe, it’s going to take several years for them to kind of unravel a lot of these highly structured deals that were done in recent years involving [operating companies and property companies] and ground leases and lending syndicates,” he said. “And keep in mind, there’s almost no [commercial mortgage-backed security] debt in Europe.”
Mike DeFrino, CEO of Kimpton Hotels & Restaurants, said the pandemic and downturn have necessitated change for brands like his to avoid falling into that loser category.
“We’re trying to be as efficient and effective with our resources as possible,” he said. “And like many other management companies and hotel companies around the world, we’ve had to rightsize the business to the demand levels of today.”
He said some corporate restructuring has helped Kimpton grow “more agile and more flexible than we were before.” But the challenge ahead for many companies like his is how to scale up in the most effective way as the industry and economy broadly rebound.
“We’re looking at how to staff and what those resources look like as the recovery goes into phases,” he said. “We’ve implemented a crawl-walk-run scenario where different parts of this recovery trigger different behaviors for properties and the home office.”
DeFrino said brands need to be clear that “cost cutting is not the be-all [and] end-all” for long-term survival, despite having made several concessions to owners during the crisis, including relaxing brand standards.
“To be competitive, we’ll need to bring things back as things recover,” he said. “Otherwise, I’m afraid we’ll risk long-term impairment at the asset or at the brand reputation level.”
When asked by Perez-Alvarado how brands can avoid being surpassed by alternative accommodations providers like Airbnb, Accor CEO of North and Central America Heather McCrory said the drivers of success for hotels aren’t necessarily going to change going forward. But there are four principles hoteliers must keep in mind: adaptability, accountability for owners, personalization for guests and “making sure every square foot of your asset matters,” she said.
McCrory said this is reflected in things companies like hers were already doing — like trying to offer coworking opportunities for guests — that will receive greater emphasis as the industry recovers.
“They’ll get ramped up in a hurry, and it’s going to become more and more important because people have flex time, they can work where they want, 'bleisure' — there’s all kinds of different words for it,” she said. “But at the end of the day, people want to be able to work anywhere, anytime, and so hotels have a phenomenal purpose there.”
To succeed going forward, the various parties involved in a hotel asset will need to be more aligned, McCrory said.
“The bottom line is we need to think like owners, always, always, always,” she said. “It’s put more emphasis on that as our owners are going through such difficult times right now.”
An unexpected phenomenon from this ongoing downturn for the industry is an overall lack of distressed assets on the market. Noble’s Shah said that has been largely due to the strong availability of liquidity through governmental help and flexibility from lenders and brands.
Ultimately, he said, that delays more than prevents waves of distress hitting the market.
“There’s a longer structural problem that’s looming here that I believe is going to lead to the kind of distress that’s going to be long lasting,” he said.
He said even with debt sitting in forbearance, interest continues to accrue on assets, eating away at owners’ equity.
“What’s happened at the same time is you’ve used all your [furniture, fixtures and equipment] reserves, you’ve got this leisure customer that’s in the property that is harder on a physical product than a traditional business customer, and some ways it’s not the same leisure customers you had before,” he said.
All of that combined with average daily rates projected to not return to 2019 levels for several years means asset values won’t reach levels seen that year until 2024. At that point, asset owners will be dealing with debt maturities and covenants.
“That is going to lead to opportunities that I think are going to be years in the making,” he said.