PHOENIX — The broad hotel industry faces a lot of headwinds right now, including labor shortages, high costs for construction, inflation, interest rate increases and the possibility of a recession.
But speaking at the 2022 Lodging Conference, Chris Devine, chief financial officer and chief investment officer for Pyramid Global Hospitality, said when you cut through all the noise, what you see is an industry thriving.
"Everyone is talking about recession, recession, and interest rates are definitely an issue for getting through deals," he said during the "Deals, Development, Mergers and Acquisitions" panel. "But the fundamentals of hotels — and we have a broad spectrum in the U.S. with independent and branded [hotels], and we're also in Europe — the fundamentals continue to improve."
He said in the ramp up to the Great Recession in the late 2000s, there were "big red flashing lights" indicating something truly bad was coming, but the hotel industry "hasn't seen that yet" when it comes to any upcoming recession.
"Our industry is typically a leading indicator for a recession, and we're not seeing that yet," he said.
Julienne Smith, chief developer officer in the Americas for IHG Hotels & Resorts, said she remains broadly optimistic, but added the current environment is "tough."
"The supply chain continues to be an issue, which is a phrase I didn't hear about as often as I have in the last couple of years, but it's causing hotels to be delayed in opening in a pretty significant way, which is very challenging," she said. "Getting people back to work and in this industry has has also been a challenge."
Overall, Smith described the industry as "being a little less new-development conducive and more conversion-conducive."
Brian Quinn, chief development officer for Sonesta International Hotels Corp., said right now will turn out to either be the best or worst possible time to pursue mergers and acquisitions — something that helped propel his company from 60 hotels to more than 1,200 over the course of the pandemic.
"Sometimes you can strike when the market's shaky," he said.
Quinn said he remains optimistic about the industry's performance and trajectory as long as the broader economy avoids widespread job losses.
"If employment stays where it is right now and continues to stay strong, I think the prospects for purchasing hotel companies and people continuing to travel is very high," Quinn said.
Mark Purcell, senior vice president of development in North and Central America for Accor, said the silver lining for how difficult it is to build hotels right now is the fact it keeps supply growth muted.
"The pipeline is 50% of what it was pre-COVID," he said. "I think actual construction versus pre-development is almost 30% off."
He added the industry remains "well below historic levels" for supply growth as demand remains strong.
"With that, I think it's a great time to be in the hotel business," Purcell said.
Difficulties don't just lie in building hotels, though. With interest rates increasing, it becomes more and more difficult to find attractive financing to buy hotels, which Devine said ultimately will be an advantage for those who can do deals with low leverage.
"If you're going to finance today at 60% [loan to value], you'll be at 70% all in, and if you're buying at a 7% or 8% [capitalization rate], that just doesn't hunt," he said. "So the biggest opportunities are for the low-leverage buyers in this environment."
Devine said he remains optimistic that this is a short-term issue, though.
"At some point, the debt markets will shake this through, and we'll get more normalized interest rates," Devine said. "It's just a matter of how long it takes — whether it's six months or 12 months."
Smith agreed that companies poised to carry less debt are in much better shape at the moment, adding those are the types of companies that thrived coming out of the Great Recession.
"I'm seeing the same thing now," she said. "Those companies that have a long-term view with a focus on liquidity will get through this as well because they're thinking about the future, not just next year's returns or this year's returns."
Chip Ohlsson, executive vice president and chief development officer for Wyndham Hotels & Resorts, said any investor who can be active in the current environment should be. But he added it's a mistake to try to wait for the perfect moment.
"You don't try to time the stock market," he said. "You do it for the long term. People who try to time it are victims of whatever that cycle is."
For the time being, Ohlsson remains optimistic about travel demand, saying a boom in business and group are on the horizon.
"We're starting to see business pick back up. We're seeing people traveling," he said. "When I hear that business travel is not coming back, I'll tell you that's absolutely 100% true right up until somebody loses the first deal. When a company loses their first deal out there, they're going to turn to their operations team and say, 'Get back out on the road and go meet with people.' And that's what we're starting to see for the first time."