Two panels, What Owners Want and Investor Outlook on the State of the Industry, at HD Expo + Conference 2023 highlighted the challenges affecting hospitality today. From money constraints to slowing supply growth and high interest rates, no topic was off limits. Below are five takeaways from these designers, developers, purchasers, and owners.
It’s important to have critical conversations with the team early on about where to spend money and how to make money. “As an owner, we have to articulate what’s important to us,” says NuovoRE president Michael Everett. “We have evaluated the market to know we’re going to get the best bang for our buck by spending an extra million dollars on the ground floor and not over-invest in the guestrooms.”
During its Marriott Transformational capital Campaign from 2018-2022, Host Hotels & Resorts made the decision to reinvent the entire hotel, rather than renovating only certain spaces. “You spend a lot of money up front, but if you spend it wisely, you’ll see that return on investment,” says Helen Jorgensen, Host’s vice president of design and procurement.
With a revised strategy on F&B, White Lodging Services Corporation has seen a significant increase in revenue. Ten years ago, the company’s food venues were doing $40 million. This year, that number has jumped to $239 million. White Lodging is investing in quality design, “leading to increased profitability and a greater guest experience,” says Peter Reardon, vice president of purchasing and procurement for White Lodging.
Recovery is on the horizon
Post-COVID recovery has happened faster than expected. ADR and RevPAR in many markets in the country exceeded 2019 levels by the end of 2022. With supply growth slowing down, hotel operators will see better performances, and ultimately, a better potential sales and refinancing landscape, adds Jonathan Falik, founder of JF Capital Advisors.
“Historically, coming out of a downturn, you build occupancy and then rate comes. The recovery from COVID was different because it was rate driven,” explains Tiffany Cooper, head of development for Kimpton Hotels & Restaurants. Yet, the ability to get money is strained. “You have to have a great balance sheet,” says Reardon, “but even with that, rates are not what they were a few years ago. Inflation has taken its toll.”
Places like Austin, Nashville, and Aspen, however, “are bulletproof,” says Everett. “If you have the capacity to do something, there is ROI there, but it’s as challenging now as it has been in my career.” JLL Hotels & Hospitality Americas CEO Kevin Davis also sees several deals in Nashville and Austin, as well as in high-barrier-to-entry markets in Southern California and Miami. “These are the best markets with strong sponsors, and it’s still tough,” he says.
Development has slowed, but continues
Private equity historically has been the biggest buyer of hospitality, but those firms are leveraged buyers; they need financing. If the cost of the debt is more than the income of the property, they will move on. “That’s one of the reasons acquisition activity has slowed,” says Davis. “We’ve seen a pick up in investors who have their own money. They’re not a five-year buyer like private equity. They may hold onto an asset for 10 to 15 years and can handle the higher interest rates knowing it may go down in the next few years.”
While there might be a hotel with great operating performance and strong cash flow, the owner still has to pay almost 9 percent to finance the hotel. “That’s the reality of what the Fed is doing to reduce inflation and slow down the economy,” Davis continues. The good news is developers are going to develop. “If it’s a good project, we can help them raise the debt,” he adds.
Durability and adaptability are key
The challenge today is longevity and durability. “Part of it is capital intensive,” says Everett. “We have to see those investments pay off over time. We want to see a five-, seven-, or 10-year life out of everything we do.”
“We own the Hilton Hawaiian Village Waikiki Beach Resort in Honolulu, which runs 97 to 98 percent occupancy every day of the year. Durability is going to be a focus for that project,” says Brenda Rauch, vice president of renovation, design, and construction for Park Hotels & Resorts. “We [need to] make sure we are keeping up as much as we can for the guest experience.”
Since the pandemic, designers have learned to be nimble. “We have to look at design from the point of view of adaptability and creating spaces that work for our current behavior,” says Gonzalo Bustamante, executive vice president of design and development at MGM Resorts International.
Collaboration breeds success
While the industry bounces back, it’s now facing other issues, including getting projects over the finish line. “Suppliers and subcontractors need to become more efficient in their processes because our schedules seem to be getting tighter,” says Jorgensen. Because there are limited resources, “there’s never enough time,” adds Rauch. In response to these fluctuating timelines, it’s all about creating a team atmosphere that invites people to think outside the box. “The basis of our success has been collaborating with high-quality people who have a high level of experience and professionalism,” says Reardon.