Best practices for navigating near a downturn
 
Best practices for navigating near a downturn
22 NOVEMBER 2019 7:30 AM

In a recent webinar, a Peachtree Hotel Group executive shared how his company is operating its sales and development strategies while preparing for a change in the economic cycle.

REPORT FROM THE U.S.—Hotel owners can’t sit on the fence for much longer.

The U.S. hotel industry is bracing for a change in the economic cycle, which means lending is scarcer and deals are fewer. But for a hotel owner that’s looking to sell, there isn’t any better time than now, said Brian Waldman, EVP of investments at Peachtree Hotel Group, on Marcus & Millichap’s recent “Hospitality Investment Forecast” webinar.

“It is a good time to be a seller; I think pricing is pretty aggressive today,” Waldman said. “And if you’re not a seller today, be prepared to hold it, be prepared to hold your asset for the next probably five years. Maybe this (cycle) will all continue to grow, and that would be great, but we look at it as if you don’t sell it today, be prepared to hold it because if there is noise or interest rates spike up, you probably won’t be able to get this pricing in a year or two.”

Waldman said investors are still bidding on institutional assets that have a “really good story,” and described his company’s deals activity as pursuing fewer deals but higher spend on transactions that make sense.

“If you look at our volume this year compared to last year, I think we’re going to do fewer transactions, but the average check size will be a bit larger as we have what I’ll call that ‘flight to quality’ … where we’re looking at irreplaceable locations whether it’s downtown locations, beach or university,” he said.

Developing into a downturn?
Marcus & Millichap SVP of Research Services John Chang said that while U.S. hotel supply growth is steady, demand has increased along with it, which indicates a supply-induced recession is unlikely.

“When you look at past cycles, (supply is) still actually very low compared to what we saw in ’08, back than what we saw in prior cycles in 2000,” he said. “We’re still relatively moderate. It’s been this slow climb, and we haven’t seen that huge spike in inventory. When you compare that to the demand side of the equation over the last several years, we’ve actually been undersupplied, which has really driven up that occupancy level to record levels over the last few years.”

The national supply picture doesn’t necessarily trickle down to every market, either, Chang added.

“It is a street-corner business, and if you overdevelop that street corner and you’re on it, that’s a problem,” he said. “But there’s a lot of markets out there where you don’t have a lot of inventory growth and you don’t have those issues.”

Waldman cautioned against “developing for development’s sake,” and instead advocated for smart renovation planning to refresh an older property.

When navigating the constant stream of new hotel brands, Waldman said his company takes the same critical approach to the value of rebranding or developing a new-build property. He cited the extended-stay segment as an example, specifically in that adding an extended-stay brand to a market where that type of demand isn’t being met is more advisable than flooding the market with another midlevel, select-service asset type.

“When you look at the major brand families, there has to be a reason for why you’re building a brand in a specific market,” Waldman said. “Don’t do it just because. Differentiate yourself, create a product that the market really needs.”

One of the biggest hotel disruptors of the past decade, Airbnb, is also a bit of an unknown heading into a recession in the near term, said Skyler Cooper, Marcus & Millichap’s national director of hospitality.

“During the last recession, Airbnb had just started and was a tiny company, and now it’s one of the largest in the world in the hospitality sector,” Cooper said. “If we move into another one, I think there is an accelerated issue that people looking for discretionary income, Airbnb is probably the No. 1 resource. So the supply of Airbnb rooms goes to maybe double overnight, if we truly get into a recession.”

Inside the numbers
Tourism Economics and STR, parent company of Hotel News Now, released updated industry forecasts for 2019 and 2020, with full-year revenue per available room expected to grow by less than 1% in both years. Later in the week, the release of U.S. October data showed RevPAR decreased year over year for the second consecutive month, the first time since December 2009 and January 2010.

Chang pointed to the U.S. Treasury’s yield curve, which economic analysts have relied on as a possible indicator of a recession. The inverted curve returned to normal in October, but Chang said that’s no guarantee that the danger of a recession is completely gone.

“Basically, the short-term interest rates went above the long-term interest rates, and historically that has been an indicator that a recession is coming within the next six to 18 months,” Chang said. “… If you look back at the last two recessions specifically, the yield curve un-inverted before the recession hit. This is not necessarily saying that there is no recession coming, it could still be looming out there, and as I mentioned there are still a lot of risks that we’re facing economically that may or may not materialize.

“The risk factors are out there, the un-inversion doesn’t mean we’re out of the woods. The train may have already left the station and we just don’t know it yet.”

Waldman said the next recession is “not guaranteed to be another 2001 or 2008,” and added that on an operations level, he’s more concerned by rising labor costs in a period of low to no growth.

“To me, the bigger issue when we’re looking at making an investment, if RevPAR is growing at 1%, but your labor is growing, your property taxes are another issue where we’re seeing creep in the P&L, your insurance you have significant creep, so now even though RevPAR is growing and everyone is focused on RevPAR, what’s the cost of that business?” he said. “We’re seeing greater creep within the middle of the P&L, which is driving a tighter bottom line. … When we’re looking at acquiring a hotel, we need to be able to move the needle, because if RevPAR is growing at 1% to 2%, that doesn’t cut it when your expenses are growing faster than that.”

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