Members of the Lodging Industry Investment Council said there are still reasons for hope around the lodging industry even during what’s presumed to be the late point of the cycle.
NEW YORK—Members of the Lodging Industry Investment Council don’t seem to be letting lodging cycle dynamics get them down.
At the council’s latest meeting in conjunction with the 2017 NYU International Hospitality Industry Investment Conference, industry experts said there are reasons to remain optimistic.
“Looking at the big picture, we actually feel pretty good about the way the industry continues to react to overhanging supply issues and economic issues,” said Robert Leven, chief investment officer for TPG Hospitality. “We continue to be reasonably surprised at the strength of the economy and the continued strength of demand.”
With much of the discussion revolving around the impact of growing hotel supply, council members considered why demand has been able to largely keep pace even when many feared a drop-off.
“We think a lot of it is demographic,” Leven said. “Between baby boomers having disposable income and the tendency to move around a lot more than the generation before them and millennials being the generation everyone wants to talk about, those are the two big demographic trends starting to work into the demand pattern for our business.”
The current political and economic climate leaves some hopeful about the potential of the hotel industry, although that potential has yet to be realized in some ways.
“Most of my time is spent dealing with investors who are not hotel people, and they believe the trends should favor the hotel industry in a way that makes it interesting, but the prognosis is still unclear,” said Sean Hennessey, founder of Lodging Advisors and LIIC co-chairman. “
Despite the reasons for optimism, the hotel industry still faces some headwinds, according to members of the council.
Bill Blackham, CEO of Condor Hospitality Trust, said he’s concerned about rising household debt levels, while Chris Diffley, managing director of investments at Rockbridge Capital, said it’s key for companies to be investing in their assets right now.
“It’s about making sure you’re putting the right capital into assets,” he said. “Those (who don’t) fall the farthest in a downturn. You need to reinvest hard to drive that value proposition and get (average daily rate) growth.”
Andrea Foster, SVP of development at Marcus Hotels & Resorts, said the increasing labor costs are a significant issue for the hotel industry.
“The biggest cost is labor, and with low employment rates, sourcing the right people and retaining the right people to create experiences for our guests is certainly a challenge,” she said. “Operating select-service hotels can help because fewer (full-time equivalents) are required, but even then you have a smaller pool to choose from.”
The desire in the development community for select-service assets was a recurring point of discussion for LIIC members.
Thom Geshay, COO at Davidson Hotels & Resorts, said that can work in the favor of companies like his that focus on full-service properties.
“You don’t see a big supply of hotels (in the pipeline) with a substantial amount of meeting space,” he said. “And the meetings business is pretty good. Our booking pace is up year over year.”
He said this is particularly true of especially large full-service properties, which he referred to as “super tankers.”
“No one is building those,” he said.
From an existing-asset perspective, council members said there seems to be an ongoing shift in the market as many real estate investment trusts work to zero in on their particular investment strategies and new and different players hit the market.
“There are some newer groups that have a lower cost of capital,” said Ben Brunt, principal and EVP of acquisitions and development at Noble Investment Group. “Companies with a nontraded REIT structure can compete differently and pay more (for assets).”
He also noted there are “different kinds of buyers” than even a decade ago, and there seems to be much more foreign capital on the prowl in U.S. markets.
Mike Cahill, CEO and founder of Hospitality Real Estate Counselors and co-chairman of the Lodging Industry Investment Council, said some properties aren’t transacting simply because existing owners are falling in love with cash flow. That will generally change, he said, if a buyer emerges who is willing to outspend the rest of the market for some unique reason.
“To close a transaction, a lot of the time we have to find one person with economies of scale or who really likes the market,” he said. “There has to be something strategic to push that extra 10% because a lot of these hotels are generating great cash flow (and owners) don’t see anything on the horizon that will kill it.”
A street-corner business
While much of the discussion revolved around trends and metrics for the entirety of the U.S., members of the council wanted to point out the industry is at the whims of regional and market-specific dynamics.
Diffley said there are markets that might look scary based on supply growth numbers, but strong demand dynamics still make them desirable.
“I would tell you we’re not afraid to build in Nashville,” he said.
Leven compared that market with another in-demand market with the potential to scare casual observers: Austin, Texas.
“I could never figure out how to get around the supply pipeline in Austin,” he said. “So we kept passing on it, and it’s still going strong.”