LIIC: Rising costs a concern for operators

New York -- While some industry fundamentals are trending positive, operating costs remain high and growing. These include healthcare, utility costs, real estate taxes and more. Members of the Lodging Industry Investment Council discussed their concerns at a meeting in June.

Operators in the group pointed out the current occupancy-based recovery doesn’t allow for new spending. And for managers that cut to the bone in 2009, there isn’t much else that can give.

“Kevin [Mahoney] and I have talked about how cost cuts have been extreme and asked how sustainable they will be. How long can you keep that up when most of the growth now is occupancy?” asked Doug Dreher, president and CEO of The Hotel Group.

“It’s property taxes, insurance costs, the cost of materials and supplies,” said Kevin Mahoney, COO of Stonebridge Companies. “I think we’ve done a good job in being smart, but how long does that last?”

Recovery also will be tough on operators because brands and owners now are increasing their pressure on management to make up cost margins and get product into shape.

“The brands have been very lenient with operators in terms of service levels,” said Larry Shupnick, SVP of acquisitions and development for Interstate Hotels & Resorts. “As business starts to come back, brands are going to toughen up.”

As a self-proclaimed “aggressive asset manager,” Steve Kisielica, principal at Lodging Capital Partners, expressed confidence that the cost of tightened efficiency is sustainable. “Our experience is that revenue will grow quicker than [operators] can add cost to the asset,” he said. “You’ve got to find that sweet spot.”

But until that sweet spot is found, operators must continue to cut costs, and be creative doing it.

“All the low-hanging fruit is gone,” Dreher said. “So is the high fruit. You have to shake the tree a bit.”

Part of the solution may lie in cutting or eliminating unprofitable cost centers (Dreher mentioned minibars as an example for some properties), and even outsourcing labor-intensive work like housekeeping and laundry.

Click here to read additional coverage of the June 2010 LIIC meetings.