Entering 2023, hoteliers across the U.S. are running into strong headwinds, with recession fears, labor shortages and rising costs chief among their concerns.

David Loeb, a former analyst with Baird and owner of Dirigo Consulting — which advises on capital markets, strategy and communications issues — said a potential recession and the impact of layoffs is the biggest concern for the hotel industry.

Loeb said he tends to focus on the stock markets and how they're affecting hotels. He said there has been a push and pull between the fundamental strength of hotel stocks, and the arm wrestling between those forces will continue for months.

Because of high interest rates, Twenty Four Seven Hotels' CEO David Wani said he expects there will be a slowdown in hotel development in 2023. The challenge that poses to developers is "the development itself then has to become that much stronger in order to be able to pay almost double the interest rate you were paying if you were getting a construction loan in 2022."

"Construction loans to begin with have a higher interest rate because there's more risk, so we certainly see a slowdown in development but more importantly, it's going to weed out the premium projects from the weaker projects that won't get funded," he added.

In terms of investment opportunities, Wani said there's been more broker activity, which could be due to debt issues.

"It's going to be hard for existing investors to refinance. Where the debt markets are, as well as the interest rates, we are starting to see more opportunities where an owner is willing to list their property because they're not going to have an alternative from a debt standpoint. We expect that to increase even more so in the first, second quarter 2023," he said.

Wani said there hasn't been a wave of distressed pricing yet, but that could change by the second quarter of 2023.

"As we have our discussions with brokers and other individuals in the investment community, most people do feel that some aspect of distress [will] happen over the second, third quarter 2023 as debt becomes even more difficult to obtain," he said. "Lenders are going to be in a position where they're going to filter out the deals; they're only going to refinance deals that they feel are really strong. ... That's where we feel we'll have some opportunity from an investment standpoint."

Richard Jones, executive vice president and chief operating officer at Atlanta-based Hospitality Ventures Management Group, said his company is working with a couple of developers on projects that were ready to go, "but the interest rate climate made it really difficult."

"On one hand, the lack of development for the sake of development and a little bit of tempering on supply over the next couple of years will be good for existing hotels, but the interest rates are going to hurt everybody. There's going to be a lot of loan maturities coming up over the next 12 to 24 months ... definitely some headwinds there," he said.

Loeb said it is increasingly difficult for hotel owners to secure lending from the big banks, and non-bank lenders have a lot less capital to replace debt.

Jones said the most significant challenge he anticipates to linger is the lack of labor.

To stay ahead, HVMG is determined to be as competitive as possible in each of its markets to minimize turnover. A strategy his team has in place now is ensuring each employee is properly positioned with wage scales. Onboarding and retention tactics are also ramping up, he said.

Jones recently met with his chief human resources officer to go through an "even deeper level of resourcing, deeper level of support tactics to help general managers overcome" the labor shortage.

"We're doing everything we can ... from compensation to retention to incentives and building the culture to overcome it," he added. "That's what it's all about today and that's what it's going to be all about for the foreseeable future."

One tactic that HVMG, and many other companies in the industry, used as a response to the pandemic is cross-utilization of employees, such as between front-office and food-and-beverage departments, in hotels that have the ability to flex the roles.

However, for cross-training and cross-utilization to be successful, it needs to be formalized and with properly executed by leadership. Employees also must be rewarded for taking on extra responsibilities instead of just being asked to do more, he said.

"That's where it really adds the most value," he said.

Regardless of what the Federal Reserve does with interest rates, labor will be the No. 1 most impactful headwind, Wani said.

New legislation across the West Coast that limits housekeeper workloads "twists the knife in the back a little more," he added.

Over the course of 2022, energy and electricity costs increased significantly compared to 2021 and pre-pandemic levels. Utility companies are leveraging peak pricing, doubling or tripling costs during the 3 p.m. and 8 p.m. hours, Wani said.

"A lot of the utility companies took the lead of oil companies and increased prices," he said.

To overcome some utility cost and labor challenges, Twenty Four Seven Hotels is looking to increase its linen pars — total amount of linen in a hotel's inventory — to reduce the amount of laundry done per day and to avoid doing laundry during peak pricing hours, he said.

Twenty Four Seven Hotels is also investing in systems to manage temperature settings for an entire hotel from one place.

"From a return-on-investment standpoint, it makes a lot of sense to do that and allow yourself to reduce your utility costs," he added.

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