There are three major times people freak out in the hotel industry: When the lodging market starts shifting quickly downward, when it’s hovering at the bottom and, most interestingly, when it’s at or approaching the peak.
General consensus suggests the peak is nigh, and I’m starting to see a lot of industry players get as anxious about the future state of the business as the Republican National Committee thinking Donald Trump may actually get the nomination nod.
This made for one of the more interesting ALIS conferences I’ve attended in many years. Typically, at major conferences such as ALIS, it’s hard to gauge what people are really thinking because their opinions are poisoned by whatever is spouted out during the opening general session.
For a commentator like me, I learned early on that’s essentially an immediate emotional reaction executives have before they’ve had a chance to fully process all that input. Regurgitating what was espoused during the opening session is a great way to have something to say during those cocktail parties that's already got a stamp of approval whilst the brain is working overtime to put together a better narrative. Those usually follow a week or so after any major industry event.
Figuring out the real state of the industry, however, is tougher to chew through than steak on a stick from a New York City street vendor. Adding to the future peering difficulty is that the industry runs on parallel streams, which confuses the narrative. There’s the operating side and also the real estate side, for example. Too many times those disparate segments are lumped together and consensus winds up being somewhere in the muddy middle, which never provides an accurate assessment.
Last week in this column I said the heroes of tomorrow are currently looking to sell, sell, sell, and that’s what I was hearing this week at ALIS. It’s also a great opportunity to repeat that in order to boost my fragile ego. Multiple owners told me how they’re recycling their portfolios by cleaning out the detritus and starting from scratch with new developments.
They’re quickly figuring out the market is at or close to peak valuations and now is the time to take profits and put that money back into new development. One developer acknowledged he probably sold a bit early, but will make up for that by putting his money to good use building new hotels.
“Unless you have the power to ride it out, sell,” says Rick Takach, president and CEO of Vesta Hospitality, who has been involved in about 45 hotel deals since he formed the company in 1996.
That’s what I’m thinking too as I currently have no hotels in my portfolio (OK, I never owned one, but like major media it’s fun to bend the facts to my advantage).
Couple that with a dearth of new supply, and it’s not hard to see where the industry is headed. Expect a new construction explosion during the next 12-24 months.
“There are lots of opportunity for new development,” said Rolf Tweeten, chairman at Alliance Hospitality Management. “Interest rates are good, financing is as available as it has ever been at the best rate. Now is the time to develop.”
Of, course too much construction and the industry will find itself slipping into the next downturn, which will be as impossible to control as robots after SkyNet takes over.
But back to the big question raised during ALIS and its theme of “Where’s the Peak?” My answer is, it depends. I always like to take firm stances!
Right now we’re getting pretty close to peak property pricing, which is making development a heck of a lot more attractive, which will inevitably lead to overdevelopment and the destruction of the record rates the industry has been enjoying for the past couple of years.
Here’s how I see it. If you’ve been dithering on what to do with an existing asset, don’t get greedy and sell. Get those new hotels out of the ground now ahead of the tidal wave of new development. And make sure those assets you are keeping are refreshed and up to date. Soon enough you’ll be competing against the shiny new hotel down the block.
Be a hero or be a sucker. It’s your call.