During a recent panel discussion at Michigan State University, hotel company executives talked about promising signs they’re seeing for the industry and economic climate, as well as new opportunities to control costs.
EAST LANSING, Michigan—Despite global political and economic uncertainties, some hoteliers remain bullish on the current and future operating and financing climates for the industry. During a recent panel discussion at a meeting of the Michigan State University Real Estate Investment Management Advisory Council, executives said there are many positive signs on which to build their businesses.
“This is certainly a year with a lot of volatility and uncertainty, at least from a macro sense. But for our business, this will be a very positive year, and it should continue into next year,” said Grant Sabroff, SVP of business development for Concord Hospitality Enterprises. “We’re very active in developing and opening new hotels, and the markets we’re in have generally been holding up well.”
Other executives were split on the impact of recent tax reform legislation in the United States.
“I don’t think it’s proven yet what the effects are going to be,” said Michael Kitchen, VP of acquisitions and development for Aparium Hotel Group. “It’s great for individual owners, who make up the majority of hotel ownership in the country. But when you talk about portfolio management or fund management, it’s a bit harder to know exactly what it will mean.”
John Keeling, EVP of Valencia Group, shared an example of what he sees as the positive effect of the law: “We were working with a prominent, well-heeled owner looking at building a hotel on a site. A year ago, he said for tax reasons he was unwilling to do anything other than enter into a lease on the land because he didn’t want to take a tax hit by contributing his site to a venture. But now with his tax rate going from 46% to 26%, he’s willing to take a look at the project.”
Forecasts of continued growth in employment and real personal incomes are reasons for optimism, said Jack Corgel, professor at the Cornell University School of Hotel Administration and senior advisor to PKF Hospitality Research.
“These are the two main drivers of our econometric models,” he said. “The fear of travel elevates when there is some kind of catastrophic event or when people are salting away their money and are afraid to spend it. While there is uncertainty, it mostly shows up in the public markets. As one commentator said, public markets shoot and ask questions later. I’m not sure that uncertainty has translated into the real economy as of yet.”
A strong real estate climate
Hotel real estate, especially the market for acquisitions, should remain strong, several panelists agreed.
“Financing is readily available, but more so for acquisitions,” said Nate Sahn, EVP of CBRE Hotels. “Lenders are competing aggressively, and it’s all up and down the food chain: from select service to full service; property type isn’t really a factor right now. There is so much debt capital that needs to go out into the market. It’s amazing how competitive it’s getting.”
Sahn said it’s becoming slightly more difficult to secure financing for new development.
“It’s not drying up, but financing hotel construction projects going forward will be more challenging, which isn’t necessarily a bad thing for the industry,” Sahn said. “National lenders that do construction loans are tightening their belts and that, too, isn’t a bad thing. However, you still see construction financing at the local bank level, where owners are in the market and are there for life.”
Concord Hospitality’s Sabroff said the company’s track record in the market and working with strong brands has enabled it to access debt capital for development projects. The company has 14 hotels under development that will open this year.
“We’re still getting multiple term sheets on deals; spreads are still pretty attractive, generally 300 to 330 points off the 30-day LIBOR, with 65% loans to total project costs,” he said. “That’s been pretty consistent for our projects, whether it is an Autograph Collection or a Hyatt Place.”
Sabroff said increasing prices for materials is driving up construction costs, which he pegged at around $165 to $170 per square foot, but higher in urban locations.
“While we’re seeing cost creep, we work hard with our contractors to keep that as tight as possible. It’s still a concern.”
Controlling the costs of acquisition
Distribution, disruption and marketing costs and their effects on hotel bottom lines were other topics of discussion on the panel.
Fred Kleisner, member of the boards of directors of Aimbridge Hospitality and Ashford Hospitality Trust, said hotel owners and operators need to select distribution channels that create the highest net operating incomes.
“The relationship between revenue and net operating income has to be monitored point by point, not just by the asset manager but also the operator or owner-operator,” he said. “My benchmark has always been that net operating income should increase at a rate of two to two-and-a-half times any increase in revenue per available room. If not, questions need to be asked.”
Robert Burg, president and COO of Aimbridge, said owners and operators pay too much attention to RevPAR and not enough to NOI.
“We live in a world in which we gauge success based on increases in RevPAR penetration, not on increases in NOI,” he said. “As operators, we need to take a leap of faith and be willing to adjust our costs of (customer) acquisition and, if necessary, lose RevPAR in order to gain profit. Developers are afraid to do so because they sell hotel real estate based on RevPAR and growth in RevPAR penetration.”
The conversation about customer acquisition was tied to the impacts—positive and negative—Airbnb and other sharing economy sites are having on the traditional hotel industry.
Valencia’s Keeling said Airbnb can be a boon for independent and boutique properties.
“Airbnb has a new dashboard in which travelers can click on the type of property they want: a single room, freestanding unit or a boutique hotel,” he said. “With Airbnb, we pay 3% commission; with online travel agencies, you pay 25%. As a result, we’re now looking at how we can link up with Airbnb to distribute our hotels. I’m sorry for you poor guys with Hilton and Marriott, but the independent boutiques might have found some money on the table.”
“The best thing to do is to play offense, not defense,” said Aparium’s Kitchen. “Direct booking is offense, so the questions are: how do I get people to book direct and how do I keep from becoming a commodity?
“Rate leaders in any market don’t use OTAs. The reason they’re relevant is because they are locally relevant. While locals don’t always need hotel rooms, they want great food and beverage, and that’s the key to direct booking. It’s the word of mouth that comes from that relevancy, and that translates into higher rates and higher profitability.”