We are midway through the first quarter of 2025, election uncertainty is over, the economy is overall solid and the Fed is currently holding steady on interest rates. Today, one would think the hotel real estate market could accurately price or value hotels, and the spread between bid and ask for existing hotels would narrow. We should be in a robust transaction market.
Yet, as a couple thousand of us experienced during the ALIS conference in January, "steady" might be the best way to describe the hotel industry right now. Most brokers are forecasting a modest 15% increase in transaction volume this year over the muted 2024 volume.
Personally, I am still waiting for “capitalism to happen” and for existing hotels to trade at today’s value, not 2019’s value. Not only do many current hotels suffer from long-deferred CapEx, many of the hotels that opened in 2017-2020 have loans coming due that are about half the cost of currently available funds. Today we have one of the largest gaps in recent history between owners' needs and their ability to execute CapEx plans.
In addition to being starved for financial capital, our industry also suffers the lack of human capital, which is affecting the capital expenditure process.
So much talent has left our industry, from the key decision makers at many major brands to the rest of the CapEx team — the project managers, GCs, architects, designers, purchasing agents and even logistics experts. The dearth of key people with the required experience and talent is as critical as the lack of funds. Although some firms retained the most senior and the most junior levels of staff, the critical “job captain” staff position is often gone. That's the person with five to eight years of experience who does the bulk of a project's direct work. All hotel owners should take notice that this lack of depth on your CapEx team is critical.
In an environment where every dollar counts, it is easy to focus on the false economy of hiring consultants based on a fee on a spreadsheet. It is critical to undergo due diligence and understand the critical scope of service differences that don’t show up on a bid leveling spreadsheet. Owners are going to work closely with this CapEx team for 18-48 months, so they need to choose wisely. Before the team is retained is the time to invest in true due diligence: checking references and using your network to also check references not provided. Invest the time up front to help prevent massive issues later in the process.
It is especially important today to determine if all firms on the CapEx team still have the experienced staff to deliver for your project. During interviews, firms will present their past “greatest hits,” so take a deep dive into the specific team behind each showcased project to ensure that the same expertise remains within the firm today. Also ensure each firm has the balance sheet to keep this team intact for the next 1-2 years if the overall market recovery is further delayed. Do they have the depth and breadth to ensure their team does not miss a beat, or might a few staff departures or an extra couple of new projects overload their ability to perform? Given the negative effect of any unscheduled displacement of revenue, it is imperative today to select firms for the entire CapEx team with a deep bench of talent, the best industry relationships, and enough gravitas in their specific segment to solve problems quickly and mitigate potential schedule and budget impacts.
Here are some tips specific to the purchasing agent role on a project: With many states pursuing aggressive sales tax audits soon after a project opens or after a major renovation, invest the time to talk to the purchasing firm’s CFO and controller and review their cash-management process step by step.
Are funds commingled or in totally separate bank accounts? What is their ability to accurately manage sales tax accrual for every vendor, as well as manage depreciation coding to the general ledger? Can they correctly execute a project closeout within 60 days of the last shipment, with accounting that is accurate to the penny? Even the more subtle items such as tax on freight based on the routing dictated by the instructions on the PO, as well as significant use tax differences based on warehouse locations, are key.
Just as smaller consultants can be suitable for specific aspects of a project, smaller vendors can work well for bespoke, lower-quantity FF&E items that are unlikely to disrupt room turnover or cause unplanned delays.
However, for larger FF&E ticket items, such as schedule-critical GC-installed hardwired lighting, wall and floor covering, vanities for the bathrooms and casegoods for the guestrooms, selecting an unknown or unproven vendor poses great risk. It is essential to prioritize vendors with the same depth and reliability you expect from your consultants. For vendors, this depth means financial stability and robust global sourcing of critical raw materials. The future is unpredictable whether it's a global pandemic, war, tariffs, or trade disputes, so overall resiliency and flexibility are key.
Alan Benjamin, ISHC, is President and Founder of Benjamin West (www.benjaminwest.com) and is the world’s leading hospitality FF&E and OS&E expert.
The opinions expressed in this column do not necessarily reflect the opinions of Hotel News Now or CoStar Group and its affiliated companies. Bloggers published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to contact an editor with any questions or concern.