The 35-foot-tall statue of Optimus Prime outside the New York Marriott Marquis on Times Square watched over attendees coming into the 45th annual NYU International Hospitality Industry Investment Conference last week to share notes, laud revenue per available room growth and bemoan the lack of deals. Hotel investors have been described as “a group of relentless optimists with strong opinions,” and that optimism was on full display on the main stage events and at the bustling cocktail receptions.
Amanda Hite, president of STR, CoStar’s hotel analytics company, presented the new STR/CoStar forecast, and revenue per available room growth for this year was revised upward to 5%. In the spirit of fair disclosure, it is worth noting that of the four national forecasts that are published by the prognosticators, the STR number is the lowest while the highest stands at 6.6%. So there is room for surprise to the upside.
But the main concern of operators is not so much how the top line grows but how much falls to the bottom line. Room rates are expected to only grow 3.5%, which is basically the level of inflation, so, in effect, real rate growth is zero. And costs are only going to go up.
It was good to hear that the industry’s lobbying on Capitol Hill includes a proposed new visa type H-2C, in addition to the traditional H-2B visas, which is specifically targeted at hospitality staff from abroad. These and other concerted efforts could help keep labor cost growth manageable.
But the question, as was posed by the Monday morning CEO panel, remains: How do we as an industry attract more workers if immigration laws are not changing? More flexibility and more work-life balance are now more than ever necessary to attract talent. In one instance, the head of a large management company told me that their offer of a four-day workweek was met with a rush of new job applicants. It takes that kind of innovative thinking to stay ahead of the competition.
And staff is certainly needed to accommodate the demand growth that seems to show no sign of abating. A recession notwithstanding, described by panel moderator Sara Eisen from CNBC as the “waiting for Godot” recession, the outlook for leisure and group demand is strong. Marriott International CEO Tony Capuano even went so far as to call these “boom times.” RLJ Lodging Trust CEO Leslie Hale specifically talked about the strong demand from small groups in her hotels. And the ever-insightful Accor CEO Sébastien Bazin was quite prescient when he focused his spotlight on the emerging traveling middle class from India. But when asked if he was indeed investing in India to capture this demand, his response was an emphatic: “No.” Instead, he is investing in the destination countries where members of the Indian middle class are traveling.
Contrast these positive vibes with the lack of deals because of debt cost uncertainty. One broker told me his shop's volume this year through June was 25% of its 2022 total, and there really is no catalyst for an acceleration in sight. Equally, through the first quarter, the hotel transaction volume according to CoStar was 50% off from a year ago. And all conversations and anecdotes point to a further deceleration. Of course, Blackstone does what Blackstone does, and they are selling the JW Marriott in San Antonio, Texas, for $800 million and are poised to realize a substantive profit. The deal gave Ryman Hospitality a new location for their group rotation. On the same day, the REIT Park Hotels & Resorts decided for a variety of reasons that the recovery in San Francisco is so far off that it is not worth servicing two outstanding loans and they effectively handed back the keys to the lender. Now, this may also be a beginning of a longer conversation with said lenders, but the sentiment does not do San Francisco any favors.
To allow for refinancing in a higher interest rate environment, owners need to get creative to avoid foreclosures and to right-size their capital stack. And the closing IREFAC panel of industry owners, CEOs and other dealmakers confirmed that all eyes are on the debt markets, specifically the private lenders. Eric Resnick, CEO of KSL Capital Partners, characterized those as having a “golden moment,” and Kevin Jacobs, chief financial officer and president of global development for Hilton, said they were having a “bonanza."
There was the usual back and forth about REITs being taken private, and Strategic Hotels & Resorts founder and former CEO Laurence Geller, ever the flame-thrower, pondered: “REITs: Why are they there?” But despite depressed REIT stock prices, it is hard to fathom that private companies will take this moment to take over public companies, especially if they instead can lend while generating equity-like returns with a preferred place in the capital stack.
Looking ahead, the panelists agreed in their sentiments that by this time next year, the interest rates will be lower, the credit markets will be open and inflation will be lower. Leeny Oberg, Marriott International's CFO and executive vice president of development, agreed in general but cautioned the audience that “it will take longer than all of us would like.” And a longer recovery could lead to a shakeout of companies or concepts.
Gilda Perez-Alvarado, global CEO of JLL Hotels & Hospitality, predicted that there would be a welcome separation of ideas. She opined that “with free money, every concept worked” but that we are now in the “Darwinian phase: Survival of the fittest.”
This all leads us back to the Transformers I referenced at the beginning of this article. And as the second half of 2023 gets underway, paraphrasing Optimus Prime might be a fitting marching order: “Hoteliers, transform and roll out.”
Jan Freitag is the national director for hospitality market analytics at CoStar.
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