Consultants use a number of different approaches to determine whether a downturn is on the way. Here's what the seven of them incorporate into their formulas.
MIAMI—Predicting the timing of the next downturn in the hotel industry is a little like forecasting stormy weather—everyone knows it can turn with little notice and the results can be catastrophic.
Looking ahead can pay great dividends when it comes to preparation, according to seven members of the International Society of Hospitality Consultants who spoke during last week’s Hotel News Now/Castell Project think tank called “Now is the time to think about the next downturn.”
Speaking at the 1 Hotel South Beach, the panelists outlined key indicators—ranging from revenue per available room performance to job applicants to investor sentiment—that they look when weighing whether a downturn is on the horizon.
- Read speakers' advice on preparing for a downturn
- Read takeaways from consultants on dealing with a downturn
Amanda Chivers, managing principal for Crown Hospitality Consulting, said while it’s easy to focus on RevPAR when looking for signs of a potential downturn, she puts a lot of stock in capital-markets trends.
“We definitely look at investors’ sentiment and where the money is going in the capital markets,” Chivers said. “When I start to see a lot of my clients, which are private equity firms and building capital funds, raising money … It’s typically a sign that they are preparing for what’s to come.”
Deborah Friedland, managing director for EisnerAmper, also looks at financial-related trends when determining the state of the hotel industry.
“My main indicator right now is the flattening yield curve,” Friedland said. “What we’re seeing is that the two-year treasury is pretty much in sync with the 10-year. That’s worrisome. That’s a key indicator that a recession is possible and might be occurring more quickly than we would have thought.”
Last week’s Wall Street selloff was a bit scary, too, because traders didn’t jump right back in and could be an early indicator of turbulent times ahead, she said.
Suzanne Mellen, senior managing director-practice leader for HVS, said that things look good at the moment with 4% compounded annual economic growth forecasted, hoteliers have two sure-fire ways to see dark clouds looming.
“When you start to see hotels start to not meet their budget, and they have all sorts of reasons why they’re not meeting their budget, but you can’t quite put your finger on it — that’s usually a key sign,” Mellen said. “Also, year-over-year evaluations. And thus far we’ve been holding steady on most values, but with rising interest rates and real flattening of RevPAR and net income, those may start to slip. So that’s what we’ll be looking at.”
Tea Ros, the Switzerland-based managing director for Strategic Hotel Consulting, said warning signs can vary by region around the world, and at the moment things look stable.
“There’s nothing that sort of pokes out in the sense that this is a major concern, this is something that we all need to be collectively looking at, keeping an eye out,” Ros said. “There are lots of issues and challenges in each of the regions and on a country-wide basis. But I wouldn’t say these are indications of a wider downturn.”
For example, she said that for the past few months she’s been getting “a lot of ‘What’s up?’ messages from Middle East hotel leaders.
“Usually when you get the ‘What’s up?’ messages, when the (leader) himself is calling—it’s not the team, it’s not their advisors—it’s the guy right at the top who is always trying to diversify their investments, trying to go outside Middle East and find investments outside,” Ros said. “That, to me, is a very clear indication there is trouble in the region. People are looking to diversify. But that’s a region’s specific issue and not the overall downturn.”
Ros said it is a good idea to keep an eye on unemployment and longer-term stock market results as key indicators of an impending downturn.
Cecilia Gordon, director law firm Goulston & Storrs, said she watches for two things:
- “One is when an increasing number of clients start saying, ‘I have to agree to that,’ and they don’t push back that one last time on the deal term, or they don’t say, ‘I just can’t accept that. I have to agree to that, I have to accept it,’” Gordon said. “Then we start seeing that significant number of deal calls—something is clearly in the air.”
- “The other thing I look at is … when people start saying, ‘I’m not so sure about hotels because maybe they’re not institutional quality investments,’” she said. “That may have shifted since the last downturn—there’s a lot more institutional money and institutional faith in the asset class.”
Judy King, founder & principal for Quality Management Services, said she looks at unemployment figures and the applicants-to-open-position ratio as key indicators for the health of the industry.
“Right now, there are many clients that are in a deficit for some positions,” King said. “We’re having to talk (applicants) into taking positions that they never applied for in the first place. And so what we’re looking at is: How many people are out there who are interested in work?”
King said when there are many more applicants applying for a smaller number of open positions means the economy is tightening and a downturn could be on the way.
That ties into department-specific challenges, according to Jennifer Findlay, founder of Core Essence, a spa-and-wellness consultancy. Keeping tabs on future bookings for services is one way to spot an oncoming downturn.
“In previous downturns, cuts and closures were a big theme in spa and wellness,” Findlay said. “We’re hopeful that our business models were put to the test, and from previous learnings, now we’ve come back in the wellness world with more robust, more resilient, more agile business models.
“There’s been a real movement away from spa being looked at as a luxury, and now it’s really moving toward (being) a necessity,” she added. “It’s not something that (guests) are doing monthly or annually, but something that they’re enjoying daily.”