Elongated hotel cycle offers optimism at Lodging Conference

From left: Wyndham Hotel Group's Geoff Ballotti; LaSalle Hotel Properties' Mike Barnello; Trump Hotels' Eric Danziger; Aimbridge's Dave Johnson; and Best Western's David Kong. (Lodging Conference CEO Panel)

PHOENIX — The annual Lodging Conference, here at the Arizona Biltmore, a Waldorf Astoria Resort, is known as the hospitality industry's casual conclave, a chance for the industry's glitterati to dish and deal in chinos or a sundress, no suit required.

Still, the relaxed nature of the conference belies a seriousness: toward the end of the year, where is the hotel industry headed in 2018?

J.P. Ford, SVP and director of global business development at Lodging Econometrics, noted that the industry is operating amid a prolonged cycle, and illustrated that with some heady numbers. According to Lodging Econometrics, there are 608,837 rooms in the U.S. pipeline, and at 5,000 projects, it's the most since Q4 2008 last time. New York leads the way with a 181 total projects in the pipeline. 

Ali Hoyt, senior director, consulting and analytics for STR, highlighted three main points that illustrate laggard industry operation: 

  1. Demand may still be outpacing supply, but "we expect that to reverse," she said.
  2. Lack of rate growth given peak occupancy. "Rate growth should be higher and there is a lack of transient pricing power in the upscale segment," she said.
  3. Modest RevPAR growth expected to continue.

On the transactions front, Adam Lair, managing director and senior partner at HVS, said that last year transaction volumes were down and that they are expected to be flattish this year.  However, the CMBS market that "dried up" last has returned, but is still not back to 2014 levels.  .

"Uncertainty about the market continues," he said. "It's a mature market, underwriting is conservative and there is a wide buy sell gap.

What the C-Suite Has to Say

What is an industry conference without CEO talk? Brands, the proliferation of them, continues to be a question that follows hotel CEOs everywhere they go.

Some are blunt: "There are too many brands and that's good for brand companies, but not so for owners," said Michael Medzigian, chairman and managing partner of Watermark Capital Partners.

Eric Danziger, CEO of Trump Hotel Group, which under his leadership has launched two new hotel brands, Scion and American Idea, gave the audience of more than 1,800 a jolt when he said, "There is room for new brands because some other brands should be shot in the head or put out to pasture."

However, he did admit that myriad brands are tough to swallow for a hotel owner buying into a brand family. "It's hard to imagine an owner that bought into a company and now there is 30 brands coming through that same system. It might be good for the customer but may not be the best for an owner."

Still, the addition of new brands, whether organically or through M&A, is a way to grow scale, something David Kong, CEO of Best Western Hotels & Resorts said is so vital in today's hospitality landscape. Best Western during the conference announced a new soft brand to target the upper-midscale market—it's third such affiliation program.

"Scale is vitally important," he said. "If you don’t have it, it's hard to compete. Marriott can spend so much more money on everything, from technology to sales and marketing. So for smaller hotel companies, it's harder to compete.

"New brands attract new customers, and there is now a dizzying array of choices, but people want choice."

Geoff Ballotti, CEO of Wyndham Hotel Group, which totals 18 brands, not surprisingly doesn't think there are too many brands in the marketplace. "We are distributors filling needs," he said. "It's about distribution and contribution for owners."

According to Dave Johnson, president and CEO of Aimbridge Hospitality, loyalty has never been more important. As a management company with more than 400 hotels, Johnson said he has a holistic view of brands. "Loyalty programs drive revenue," he said. 

He aded that he believes consolidation within the industry will continue and there will be proliferation not just of brands, but, specifically, soft brands. "There are assets out there and consumers like that uniqueness," he said. 

Scale, meanwhile, comes with technology and expense. In the hotel industry, technology is akin to an arms war, and with each new product that is rolled out, brands, owners and operators must decide what to invest in and if there is a true ROI from it—in addition to fulfilling an actual guest need.

Daniziger is no Luddite, but is concerned about the industry using technology as a crutch or replacement for true customer service. "Our industry relies to much on technology and we get away from the basics," he said. "We add too many layers between guests and employees and are we actually initiating things a customer really wants and values? Let's get back to the business of hospitality."

But according to Ballotti, technology, he said, "has never mattered more," a distinction that comes with being responsible for thousands of hotels versus a handful.  

Noting the record-breaking pipeline numbers, most accept that development will continue and not be bottled up. Further, lenders are still making it opportunistic to build. "We are still in a great low debt environment," said Michael Barnello, president and CEO of LaSalle Hotel Properties. 

However, he admitted, that cheap debt invites new supply, which is a sworn enemy of hotel owners, like LaSalle. "When the cost of debt becomes unattractive, supply will come down, which provides a breather," he said.

Kong remarked about the glut of new supply coming into top 25 markets that "it’s hard to find a good location. It's good, then, to look at secondary markets. 

Aimbridge's Johnson heralded the comeback of the CMBS market and agreed with Barnello on the attractiveness of cheap debt.

On the next great market to build in, Johnson quipped, "wherever Amazon's new headquarters is going."