Though no one is clear exactly how far the industry has fallen on the downward half of the current cycle, analysts have taken to assuring operators that hospitality is going to stick a “soft” landing when it bottoms out this time around compared to the resounding crash of 2008. At this week’s HX: The Hotel Experience event in New York City, during a panel discussion between members of the International Society of Hospitality Consultants on what the current economic climate says for capital expenditures, amenities and developments, incongruity was in the air.
Chad Sorenson, principal at CHMWarnick, said demand has never been higher but growth has begun to slow compared to past months. His big takeaway from the lessons learned by the industry since the last ISHC CapEx book was release in 2014 was the degree to which CapEx has grown, and the amount of money required to maintain a hotel property today.
“For the first one to five years Capex is 0.5 percent, but once you reach 16 years Capex grows to 8.3 percent and it doesn’t slow down,” Sorenson said. “By year 21 it reaches 9.8 percent, peaking at 10 percent in year 26 before dropping to 9.6 percent in year 31. There are no signs right now of this slowing down or decreasing; it will only continue to grow.”
The performance peak for CapEx, according to Sorenson, was reached in 2008 at 11.6 percent. “It was the worst year we had seen for the industry from a performance standpoint, but the capital had been approved and the renovations were underway,” he said. “It began to slow down in 2009, reaching 7.9 percent, and bottomed out in 2010 at 5.5 percent as the industry started recover.”
At that time, it was too late to back out of projects that had already been signed even though operations could no longer support them. Sorenson said that the industry is heading into the bottom of the cycle in the next 12 to 24 months, and in order to succeed Sorenson said it would be best to educate yourself outside of your own discipline.
“You don’t need to be an expert, but knowing just enough may be the difference maker,” he said. “Know about procurement and what the brands are doing. Be aware. That resonates. If you know more outside of your core competency, that goes a long way and can be the difference between being hired and not.”
Amenities and Services
As the conversation shifted to amenities and services, Sorenson noted that hotels are going all inclusive with regard to most amenities. Roger Hill, chairman and CEO of The Gettys Group, discussed the growing emphasis on free amenities and experiential travel and how it has developed a renewed interest in hostels, as well as a more upscale offering he deemed a “poshtel.”
Hill described a "poshtel" as a hotel offering with the same square footage as a traditional hostel, but with higher-quality finishes. He likened it to a tailored or customized experience, but not quite on the level of a luxury yacht or private plane.
“At this point in the cycle, this is a market you want to be in as a consumer and a developer,” Hill said. “CitizenM guestrooms are 8 feet by 16 feet, and their public spaces act as relief zones. It’s very effective because single beds get the same rate. It appeals to travelers who, from a psychological perspective, want to feel like millennials.”
Time to Renovate
What do you do if you already own properties, but the prospect of a changing economy has you shaken? Alan Benjamin, president of Benjamin West, said if you own a hotel asset or plan to own one in the next five years, understand that now is the time to renovate. But first, communicate with your project manager to understand the life cycle of your asset and know how long they expect to hold on to it.
“Another thing, if you are a short-term owner you can’t time the market,” Benjamin said. “It’s just like the stock market. People want to exit during times when they can’t, and you need to communicate with ownership about timing to avoid this.”
And if you are going to renovate, Benjamin said it’s time to sweat the small stuff. Leaky roofs, window sills, air conditioners, wall coverings, carpets, furniture, fixtures and equipment, and before all that take a look at your property’s foundation. Benjamin also cautions against trying to predict the near future during the renovation process.
“Brands are going hip and cool, but don’t take it too far,” he said. “It’s nice to be first to market sometimes. Other times it’s a lot safer to be second. Many innovations don’t hold up in the long term. The cycle is six years for softgoods and 12 for hardgoods, so any decisions you make during a renovation you will live with for a long time.”
Benjamin also spoke about the need to pick your renovation partners very carefully, and avoid traps set by small teams promising low fees. From the time partners first meet to when a property closes out a project typically takes 18 to 36 months, so it's important to select the right team.
“You are going to be married to those consultants,” Benjamin said. “Great firms like [Hill’s] can write specs that are buildable, they take into account the Americans with Disabilities Act, life-safety codes, etc. Don’t hire a low-bidding firm and become someone else’s crash-test dummy.”
Darlene Henke, president and CEO of freight and warehouse management service Audit Logistics, said that disruptions in global trade are leading to delays in the transportation of furniture and materials necessary for hotel development in the next 18 months. South Korean transportation company Hanjin Shipping recently filed for bankruptcy, meaning there all be less capacity for goods coming from Asia, and as capacity decreases costs will go up. Henke also warns of potential port issues in the near future.
“Deliveries may not clear customs in a timely manner, so when planning an update add two to three weeks of lead time to the project,” she said. “Crude oil is at a record low, but diesel prices are going up, creating a higher cost of trucking goods domestically, so take that into consideration as well.”
Despite this, the takeaway is still to plan on renovations for the near future, but keep an emphasis on the “planning” stages.
“Talk to the people that are planning projects, or opportunistic buyers on the sidelines, and start to build relationships with them and look to potential acquisitions,” Hill said. “Take a crisis and turn it into an opportunity. Start to chat now, and if we have a slowdown know the benefits ahead of time. Don’t prepare just for the worst, but also for opportunities. It’s sensible to think of a potential downside, but also consider the potential upside.”