LOS ANGELES — The hotel industry is settling into familiar patterns, but several factors continue to keep hoteliers on their toes.
During a meeting of the Lodging Industry Investment Council, hotel executives spoke about how they're adapting to conditions that are both familiar and new.
What feels normal now is the return of hotel demand, but what’s still abnormal is the desert of new supply looming over the industry, said Steve Van, founder of Van Investments. Nearly everything is in a state of flux.
“That’s why it’s hard to make predictions,” he said. “Nonetheless, we’ll be making them today.”
The industry is in a sort of new normal, and it’s starting to settle into the fact that the business looks different now, said Rob Leven, chief investment officer at Procaccianti Companies and TPG Hotels & Resorts. There’s been a disruption in travel patterns, and the post-pandemic world is reconfiguring what normal is.
“I’m not saying it’s all negative,” he said. “There are some positives to some of the reconfiguring, like remote work and the ability to extend business trips through Friday or Sunday to create additional demand.”
Many people got used to interest rates being near zero, but that wasn’t normal, said Charles Oswald, CEO of Aperture Hotels. Interest rates will decrease, but the base is going to settle in a place that’s higher than what people were used to. The rates will not go back to the lows from years ago, he said.
“There’s a different stabilization of interest rates and that affects our industry, and I think it’s going to take a while for [average daily rates] to catch up to the real business costs that we now realize in our industry. Labor is going to be costly for a while.”
PM Hotel Group President and CEO Joseph Bojanowski said he’s not sure that the industry has reached normalization, but it is in a more stabilized environment. With lower volatility, the business becomes more predictable, allowing hoteliers to plan and be proactive. Hoteliers got better at being reactive in recent years, whether it was to the pandemic, interest rate increases or changes in the capital markets. Now it has the opportunity to take a new approach, he said.
Hospitality Real Estate Counselors founder and CEO Mike Cahill questioned whether the end has come for the traditional cycle hoteliers are used to.
“What if it is actually we’re switching with the new paradigm where there’s just a narrower band and maybe 10 years where temperatures and things are down 10%, but barring a black swan event, there’s no real peak?” he asked. “It’s just business as usual.”
The environment is more predictable, but that doesn’t mean there will be less disruptions, Van said. Incremental growth and lower interest rates are expected, but there’s also a wave of debt maturities coming due that won’t be refinanced under any circumstances, he said.
Another pending disruption is the lack of new supply coming to the industry, Van said. The industry norm is about 2.3% growth a year, but last year was 0.3% and this year will be 0.8%.
“I don’t know if it’s ever been that restricted for a few decades,” Van said.
With supply low and demand growing, there will be hotels changing hands because owners can't refinance them, he said. If peak valuation is expected to hit in a few years, now would be the time to buy some hotels, he added.
There was a similar supply drop in 2009 and 2010 because of a lack of financing, Cahill said. The government's intervention in the crisis led to a seven-year upmarket. That created an environment in which someone could buy a hotel, flip it and because the cycle was so long, they could re-flip it.
The difference with this cycle is there’s been a transformation in how people are traveling, Leven said. In the previous down cycle and recovery, people traveled the same way as before and people were still working in their offices. This time, there has been a shift in the workforce and travel preferences.
Commercial travel will continue to recover, and that might be through business-transient guests or companies that have remote workers setting up monthly or quarterly meetings, Bojanowski said. This segment, along with international inbound travel, will continue to grow.
“There’s some pricing power there, or the fundamentals will be in place at least to hold minimal pricing,” he said.
The lack of new supply coming to the market will help the industry maintain rates even if demand doesn’t maintain, he added.
For PM Hotel Group, ADR integrity is a priority, Bojanowski said.
Group and commercial demand will grow, and international inbound travel is expected to rebound, particularly in gateway cities, he said. New York will have a good run with the drop in alternative accommodations, as well.
“There’s just a lot of reasons why we’re optimistic about continued rate growth,” he said. “Do we think it’s going to be 5% or 10%? No, but we think there’s going to be higher than inflationary ADR growth.”
Large rate increases over the past few years were partly due to the mix of business changing, Oswald said. There was lower demand from commercial segments, but the big brands’ strategy was to lock in rates. Now that there’s a higher mix of commercial travel coming back, the rates are starting from a base that held and didn’t grow.
“That’s part of the rate pressure so far,” he said. “From a revenue-management standpoint, from a sales and marketing strategy standpoint, we’ve got to find ways to push the commercial segment up in rate and also reduce our customer acquisition costs.”