MADRID — Over the past 50 years, hoteliers have dealt with inflationary pressures in a perfunctory manner — they passed those higher costs on to the guests.
But Russell Kett, chairman of business consultancy HVS London, said during a panel at the Atlantic Ocean Hotel Investors’ Summit that following that trend won't be enough this year.
“In the 1970s and 1980s, inflation was seen as a massive benefit, but now, there are a lot of hoteliers experiencing it for the first time,” he said.
Inflation is having a profound effect on the hotel industry, as well as the discretionary income of its potential guests.
At a panel titled “Revenues and costs in an inflationary age,” speakers pondered if the coming years will be kind to hotel investors saddled with an array of pressures to the bottom line.
Ron Barrott, founder and chairman of Australian-based owner Pro-invest Group, which has recently entered the European market, said hoteliers are prioritizing reducing expenses, with IT systems really showing their worth.
But an unknown cost hotel owners are trying to plan for involves environmental, social and governance requirements that have yet to be formally legislated or benchmarked for the industry. Panelists said these costs will cause hotel owners’ eyes to widen the most, but for now, the key is patience.
“The investment requirements over the next 10 to 15 years on ESG will be huge. We’ll have to justify this end to a means in terms of return on investment," said David Kellett, managing director of hotel transactions at Invesco.
Kevin Colket, founder and CEO of Global Hospitality Investment Group, said it's important to exercise prudence in a risky environment.
“If experience has shown me anything, it is when the risks are higher than the rewards, stand aside,” Colket said.
He said hotels are in a race between demand and supply and also between revenue and expenses.
“I do not see [average daily rate] going up quickly enough to offset expense increases, at least not in 2023,” he said.
Barrott said this is yet another challenge that hoteliers will solve.
“I’m not scared. It is just something you have to deal with,” he said.
ESG Legislation Draws Near
Global Hospitality Investment Group's Colket said hoteliers must put their thinking caps on to reach the necessary return on investment from sustainability initiatives.
“There’ll be a lot of innovation we have not thought of yet. The industry will be flexible, and we will need to work as an owner group to work better with government,” he said.
Colket added that the European Union will likely be the first to impose ESG legislation on businesses, including hotels.
Kett said historically such allegiances between businesses and governments have not gone well, with the exception of hoteliers in the U.S.
Hoteliers will have to make tough choices as to how to invest in ESG, Kellett said.
“It will be selective due to the huge scale. [ESG] is a real estate issue, not a hotel one,” he said. “One effect will be that location will become even more important, as every hotel will need ADR that justifies it.”
Pricing Inflation
Invesco’s Kellett said how hoteliers price rooms in an inflationary environment is difficult to forecast, but it will be market-specific and frame future investment decisions.
"The uncertainty of inflation will lead to more scenario planning,” he said.
Colket said there are so many variable and risk and yield curves, the hotel industry is all over the place.
“We’re definitely modeling more expense growth than we are revenue increases,” he said, “and focusing on seeing something someone else has not seen.”
Pro-invest’s Barrott said experienced hoteliers likely understand the long-term fundamentals and will see opportunities in terms of currency exchange, the cost and structure of capital and hotel valuations.
“In 2022, the cost of capital changed, but the flip side is trading and there being plenty of money out there, investors looking for core or core-plus,” he said, speaking of conservative and low to middling risk investors, respectively.
“Pension funds like hotels at the moment as government bonds are trading at zero. … but the problem is everyone is selling hotels at 2022 prices, while buyers want to buy them at 2023 prices,” Barrott added.
More concern comes from the continued war in Ukraine, the uncertainties in China and overall staffing challenges, with all three adding to total costs.
“The costs we’re seeing are scary,” Colket said.