Hotel executives on the opening general session at this year’s Meet the Money conference discussed labor issues, branding challenges and opportunities, M&A activity and Airbnb.
LOS ANGELES—The general consensus among hoteliers at the opening general session at Meet the Money 2019 is that while the economy and hotel industry overall are doing well, there is still a great deal of uncertainty and a number of challenges that should have hoteliers acting carefully.
During the “Views from the executive suite: What’s important now?” general session, panelists laid out what are some of the biggest issues facing hoteliers today.
Will Obeid, VP and head of hospitality at Kushner, said he’s not a fan of the phrase “war for talent” because that indicates some kind of conflict. The best companies out there are the ones that naturally embrace the best talent in the hotel industry and are able to retain those people, he said.
“I think that remains probably the best thing we can all do in this business,” he said.
JF Capital Advisors has a fair amount of turnover even with good training and benefits, CEO Jonathan Falik said. Different situations arise, such as the No. 2 salesperson being offered the position of director of sales at a new property because of signing bonus, he said.
Revenue-per-available-room growth is ranging between 2% and 2.25%, and wages are growing and continue to be the single biggest expense hoteliers have, Falik said. His company is working on a development project in Silicon Valley, California, where minimum wage was $10 an hour six years ago, but it’s $15.85 now.
“That doesn’t sound like a lot, but that’s a 50% increase in wages over six years,” he said.
It becomes even more complicated in major urban markets with a lot of union-operated hotels, because it’s not just a matter of wages, he said. There are work rules and benefits “that can take a profitable business and decimate it,” he added.
G6 Hospitality continues to outsource when possible and consolidate services, CEO Rob Palleschi said. The company also is doubling down on technology and training. Most of the training videos start in Spanish and are translated into English instead of the other way around, he said.
The company is also investing in high school programs and at junior colleges and regional-based colleges, Palleschi said.
Garrison Investment Group has been aggressive and focused on retention, said Chuck Pomerantz, head of asset management. It upped the ante in offering bonuses by telling its management companies that if they hit a goal, the company will share profits with them, which created a lot of excitement.
“We’ve been able to retain at all levels of the management side,” he said.
Condor Hospitality Trust focuses on secondary markets that have both population and job growth above the national average, said CEO Bill Blackham. That helps alleviate some of the labor pressure seen in other markets.
Operationally, through its asset-management functions and working with managers, Condor builds a tremendous connection with department heads at its hotels and building loyalty into those relationships, which translates down to the employees as well, he said. That has manifested in more favorable rates.
“We’ve been able to maintain our margins while others have seen margin decreases,” Blackham said.
Branding has always been critically important because guests have a perception of where they’re going to stay, Obeid said. As to whether there are too many brands, this is a capitalist society, so while it’s fun to argue back and forth on that issue, that’s up to the consumer to decide, he said. Kushner is brand- and management-company-agnostic, so when it acquires and develops a property, it’s looking for what is best for the asset, he said.
While Kushner is open to branded hotels and brand-managed hotels, Obeid said he’s not in love with the idea of taking key money from a brand for a new deal, particularly for a brand that is trying to achieve maximum velocity. Taking key money also sets up a strange dynamic with the brand.
“I would rather have the management agreement that comes without the strings attached to the key money,” Obeid said.
Falik said he would never recommend choosing one brand over another for key money, which comes with strings attached. That said, his company has taken it in certain deals where the brand the company wanted already made sense, such as it being underrepresented in the market and it could enhance returns meaningfully, he said.
“Key money is fine, but we would never recommend a deal with key money,” Falik said. “If it doesn’t make sense in and of itself, don’t do it.”
As long as new brands are designed and built for the consumer, they’re in good shape, Palleschi said. Brands shouldn’t be designed just to be a development option for someone to fill in a dense market and skirt an area of protection.
“The focus is on the consumer first, not the development opportunity,” he said.
A brand is a promise consistently delivered, Palleschi said. Those who can’t describe it can’t sell it, so they can’t expect consumers to understand it.
There is tremendous confusion among consumers in differentiating brands from others within the same brand family, Blackham said.
“If that’s not addressed, we have to ask: What is the value of this differentiation?” he said.
There is a large number of hotel real estate investment trusts relative to the asset value of the industry, Falik said, comparing it to the size of the multifamily and office building REITs in the U.S. Citing the recent announcement that Park Hotels & Resorts plans to acquire Chesapeake Hospitality Trust, he said it sounds like there is a lot of mergers-and-acquisition activity taking place, but there actually isn’t.
“We should have seen two to three years ago one (M&A) after another after another,” he said. “There’s been a few.”
Debt financing now is good and fairly robust, but it’s not as white hot and chaotic as it was in 2007, Falik said. Large companies are trading well, but when RevPAR growth expectations are near 2% and there are increasing costs because of wages, operating expenses and property taxes, “that doesn’t lead to super rosy underwriting,” he said.
M&A is happening and it will continue, Falik said. The industry has seen it in the deals involving nonpublic management companies, such as 21c Museum Hotels and SBE. The industry will see more that type of M&A, in which a larger company folds the smaller one into it, he said.
“We will continue to see some more in the public REIT M&A landscape, but it’s not driving the industry,” he said.
One factor that has played into the limited M&A activity is the decline in number of players who are large portfolio buyers, Blackham said. The transaction marketplace is more robust in the $20-million-to-$125-million space, he said. In comparing stats from last year to this year, the prevailing thought that continues to echo is that this stage in the cycle has RevPAR growth decreasing while cost pressures from real estate taxes and labor increase, which can be too big of a risk.
“If you have a limited number of buyers or small group of buyers, and that is the thinking, (then) that contributes toward what you are seeing of less transactional volume than you might expect,” he said.
The issue the hotel industry has with Airbnb is supply and demand, Falik said. In certain markets, it’s easy for guests to find a hotel room that’s not expensive. The industry is at peak occupancy functionally for the U.S. as a whole, but average daily rate isn’t exploding. With the occupancy the industry has had for the last several years, ADR should be growing more than it is, he said. Airbnb is a shadow supply, but all hotel revenue managers don’t have the right algorithms to include it. Airbnb and home sharing isn’t the only issue, but it’s a big one, he added.
Hotels are different than home sharing, and there are services hotels provide that Airbnb doesn’t, Pomerantz said. Airbnb doesn’t have the personal touch with guests that hotel staffs do and it doesn’t create a communal experience like a hotel’s lobby. Brands and operators need to focus on things like that and build loyalty through it, he said.
What continues to be frustrating about the hotel space in relation to Airbnb is that the industry is still reluctant to guarantee a bed type or a view or that guests can reserve connecting rooms, Palleschi said. Those are all things Airbnb can guarantee through its listings.
“Rather than adding more brands to this or jumping up and down about a loyalty program, we should work on guaranteeing a room type more than anything,” he said.
Airbnb is moving toward guest experiences and is looking more like a proper hotel company, but hotel companies are looking more like home-sharing companies, or at least as an add-on, Obeid said. Airbnb could become a solution to high online travel agency commissions, he said. As more people are going to Airbnb exclusively for booking a stay, listing hotel rooms through the platform could help with the cost of customer acquisition.
Airbnb doesn’t have a lobby, but it’s hacking away at that problem, he said. The company’s website plays up local experiences, which is something guests want.
“They’re really creating a travel experience, not just a cheap bedroom in someone’s apartment,” Obeid said.
Airbnb is outpacing the hotel industry in technology; it can communicate better with guests than the hotel industry does, Falik said. One problem is hoteliers still haven’t figured out how to sell hotel rooms with check-in earlier than midafternoon, he said. Many people fly in early in the morning and need a chance to sleep and shower before they start the day. With guestrooms like that, a hotel could re-rent those rooms for several hours a day, but the property management system can’t handle that, he said.