Hotels: An operating business driven by real estate
 
Hotels: An operating business driven by real estate
14 FEBRUARY 2019 8:21 AM

With their daily leases, hotels achieve success or failure through a labor-intensive operating model that is benchmarked by key performance indicators. But it’s the real estate aspect of the business that often indicates the industry’s place in the economic cycle.

Key performance indicators are the lifeblood of the hotel industry. Occupancy, average daily rate and revenue per available room indicate the health of the sector, and by all accounts, it’s been a healthy decade.

But it’s another set of data that allows for an educated guess on where in the cycle the industry lies. Real estate rules the roost.

Transaction volume—indicated by the number of assets trading hands and the sum of money they’re trading for—are the barometers by which to determine the peak of the cycle. Based on 2018 numbers, we have reached the summit of the greatest run in modern hotel industry.

The nine-year upcycle the hotel is basking in has been punctuated by building momentum in the transactions side of the business. Details regarding 2018 transaction volume signals that the bid-ask gap is ever-so-slowly beginning to tighten.

Our broker friends—who by the way are experts in making hay while the sun shines—appear to be busier than ever. The number of deals that come to market are becoming more robust, but it’s those private deals for assets that never make it to market that seem to be keeping the brokers’ deal pipelines in a frenzy.

A quick sneak peek at STR’s Hotel Transaction Almanac (the full report will be released next week) shows that 2018 produced a near-record in U.S. hotel transaction volume ($29.5 billion) through 707 transactions—the largest number of hotel deals during this cycle and the most since the industry recorded 877 deals during 2007. There’s still a significant hill to climb to reach the all-time record of 945 deals in 2005, but the upward trend in 2018 surely indicates that owners are thinking that the real estate peak has been reached.

Likewise, JLL Hotels & Hospitality’s annual Hotel Investment Outlook revealed global hotel investment volume of $67.7 billion—and the Chicago-based real-estate giant expects 2019 to be more of the same with $67.2 billion of global transactions taking place.

That’s good news for buyers and sellers alike. Private equity companies continue to have a keen interest in adding hotel assets to the ginormous funds they have created. That helps buoy pricing and establish an exit strategy for savvy owners looking to sell.

The transaction frenzy isn’t limited to real estate as the continued consolidation of brands in the hotel industry helps create a clearer picture for investors. At the moment it appears that adding smaller brands, such as InterContinental Hotels Group’s acquisition of Six Senses Hotels Resorts Spas on Wednesday, is the flavor of the day. Large-scale hotel company consolidation is a massive undertaking so it’s a long and arduous process.

The other aspect of real estate that affects hotel cycles is the supply pipeline. A robust, yet manageable and absorbable, pipeline has undoubtedly elongated this cycle as it hasn’t produced any self-inflicted pressure.

STR, the parent company of Hotel News Now, reports that as of January 2019 there are 1,500 hotels comprising 195,580 rooms in construction. That’s a 4.5% increase over January 2018, which generally follows a trend of year-over-year monthly increases. That creates some concern that the industry might be on the cusp of overbuilding.

The aggressive expansion platforms of brands fuel the pipeline growth. Home2 Suites by Hilton, Holiday Inn Express, Hampton by Hilton, Fairfield Inn and Tru by Hilton are the top five brands in terms of rooms under contract, according to STR.

All of this real estate information points to a building belief that the indicators for a slowdown are falling into place. Performance status quo is now the prevailing thought for 2019. Rising real estate interest is a sure sign that hotel values have reached the same place.

Ed Fuller … the spy novelist?
I’m a big fan of adventure and thriller novels. Clive Cussler and his many adventurous characters tops my list. James Patterson is up there, too. So is Harlan Coben. And David Baldacci’s “Memory Man” series is, well, memorable. Now I’m hoping to add Ed Fuller to my list.

Fuller, the former do-it-all global executive at Marriott International, has authored a novel with Gary Grossman called “Red Hotel.” It goes on sale on 19 March—I’ve got my copy pre-ordered because it sounds like it’s going to be a fast-paced page turner. The first sentence of the promotional material: “When a bomb rips the façade off the Kensington Hotel in Tokyo, dozens are killed and injured while one man walks calmly away from the wreckage, a coy smile playing on his lips.” I already want that smiling lunatic to face justice.

Add to that the trailer that Fuller shared on LinkedIn, and they sold me pretty quickly.

Fuller, a U.S. Army veteran, is one of those iconic figures in the hotel industry that tends to stick in your mind once you meet him. I had the chance to catch up with Fuller in Istanbul in the waning days of his Marriott career and read his fantastic book “You Can’t Lead with Your Feet on the Desk: Building Relationships, Breaking Down Barriers and Delivering Profits.” My biggest takeaway from that book: You have to make on-the-spot decisions ... right or wrong, be prepared to make a move and be prepared for everything that comes us a result of that decision.

I’m looking forward to seeing how far and fast his imagination runs in this new book.

This GM clip is a soaker!
General managers are the backbone of the hotel industry. They answer to everyone and often are underappreciated by most. I enjoy walking a property with a GM and watch them interact with guests and employees … and it never fails that the best GMs are the ones that stop and pick up every piece of discarded material that might litter their property’s corridors and public space.

I walked the massive 1.3-million-square-foot Kalahari Resort & Convention Center in my hometown of Sandusky, Ohio, this week with GM Brian Shanle. The ease in which a good GM interacts with all constituents is a tell-tale sign of confidence and Shanle’s property bustles with that confidence. His recurring message during our lengthy chat focused on helping people—helping guests enjoy their experience and helping employees reach new heights. Yes indeed, it’s all about messaging and following through.

The challenges and inspirations GMs provide for employees are what makes them the foundation of this industry. When I stumbled across this LinkedIn post from Joy Stehlik, the accounting & HR manager at the Hospitality Ventures Management Group-managed Springhill Suites by Marriott in Orange Beach, Alabama, I just knew I had to share.

GM Rizwan Marfani challenged his team to improve guest satisfaction and intent-to-return scores—the hotel’s excellent staff blew its goal out of the water, so to speak. Marfani’s cannonball is a sight to behold as it hammers home why an engaged GM is revered. Congratulations to the entire team at this Springhill Suites property!

Email Jeff Higley at jhigley@hotelnewsnow.com or find him on Twitter @jeffhigley1 or LinkedIn.

The opinions expressed in this blog do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Bloggers published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.

No Comments

Comments that include blatant advertisements or links to products or company websites will be removed to avoid instances of spam. Also, comments that include profanity, lewdness, personal attacks, solicitations or advertising, or other similarly inappropriate or offensive comments or material will be removed from the site. You are fully responsible for the content you post. The opinions expressed in comments do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Please report any violations to our editorial staff.