NASHVILLE, Tennessee — The recovery trajectory of leisure and business-transient demand for hotels is top of mind for hotel owners entering budget season as a recession of the U.S. economy looms.
Sam Makani, vice president of strategic operations at Mission Hill Hospitality, said during a panel at the 2023 Hotel Data Conference that real estate private equity company is keeping a close eye on demand from leisure guests that is stabilizing and tapering off from the peaks achieved in 2022 and early 2023.
Hotels also must address business travel demand that never returned to 2019 levels.
“Especially going into what looks to be a recessionary environment, how do we reposition assets to make up for that light [business travel]?” he said.
Mission Hill is a KSL Capital portfolio company. Its portfolio consists of select-service and extended-stay hotels.
Christoph McLaughlin, vice president of asset management at real estate investment trust Ashford Hospitality Trust, said with the lack of transient demand coming in, especially at some of his company's urban hotels, average daily rates are declining.
The properties, however, haven’t changed their staffing models relative to budgets. As a result, he said, there’s more of an emphasis on flow-through.
“We’re seeing the flow-through not hit the bottom line. We’re hyper-focused on that going into 2024 budgets,” he said.
Ashford Trust also is paying more attention to flow-through to the industry to better understand how the REIT is performing relative to the industry.
“Productivity at our hotels across our portfolio [and] across the brands, what brand is doing better than other brands — that’s been very impactful, especially this year as we’re seeing ADR declines across our resorts,” he said. “We’re looking at guest satisfaction … but only to the point where we’re not at risk of losing our flags. At some point, we think that there’s only a marginal benefit to increasing guest satisfaction.”
Dominic Donatoni, senior enterprise client sales consultant at software company Revinate, which assists companies with driving additional revenue, said a big piece of budgeting this year will be labor.
He said many hotels and resorts have offered “crazy hourly rates” to attract talent. Now, as workers return, it’s tough to draw back on wages.
“Getting more flexible with your staffing is a big piece as you start looking at leisure demand. It’s getting that hybrid model. Spread that net on where you’re getting that talent from. You can normally pay a little differently based on where they’re based. That can help offset some of those challenges that we’re experiencing from the COVID times,” he added.
Asked if owners would include a slight downturn in 2024 budgets, McLaughlin said it’s on everyone’s mind.
“We do think that some of the properties could come to the table with more aggressive ADR growth than what we are going to be comfortable with. In 2023, we saw some properties come to the table with aggressive ADR growth and then didn’t manage their budgets correctly on the labor side. So we will be adamant on managing ADR expectations,” he said.
Capital-Expenditure Reserves
Andrea Belfanti, CEO of the International Society of Hospitality Consultants and moderator of the session, said hotel lenders and managers traditionally require owners to reserve 4% of their revenues for future capital expenditures.
In ISHC’s upcoming study, that number will be closer to 9%.
“Depending on location, the age of the property, the type of property, it could be even higher,” she said. “That’s a lot of money. How do you prioritize what you spend, where you spend and [when]?”
Makani said costs of CapEx projects will continue to rise in this inflationary environment.
For Mission Hill, he said, the priority with renovations is return on investment.
“In terms of scope, we’re looking at three primary factors: what enhances product quality, what enhances our market positioning to our competitive set and what enhances profitability,” he said. “A lot of acquisitions we’ve done over the last few years have significant PIPs to catch up on as well as deferred maintenance. We’re focused on adding value by finding opportunistic deals that allow us to put in capital to an independent property [and] flag it [or] take a property that needs a significant renovation and improve its market positioning.”
Donatoni said the biggest factor with tech investment is whether it improves revenue, market share, guest satisfaction and communication.
“When you start thinking about the data and where it all is, there’s silos everywhere, and it’s hard to make those right decisions if you’re not looking at it holistically across the board. There’s a huge gap from an operator’s standpoint to an owner’s standpoint because they’re incentivized differently. What a property may want, ownership may not want,” he said. “The biggest thing is figuring out what’s the most important and where is the longevity of that investment, and how does that technology align with that longer-term goal.”