Experts on the “Labor, Economy & Inflation” panel during the California Lodging Investor Conference last week brought to the stage their perspective on what to look for to successfully invest in, purchase and protect hotel assets as well as address labor concerns.
Ronald Kim, chief operating officer for Prospera Hotels in Anaheim, spoke to the challenges of owning or working on behalf of small-but-dynamic hotel portfolios, crediting his firm’s success to being an “owner-operator-developer-builder filter” that is “vertically integrated.” Justin Myers, vice president at Atlas Hospitality Group, detailed the current complexities of hotel investment based on his transactional experience with upper midscale, upscale and select service hotels.
Jackie Collins, senior director and 20-year veteran of Houston-based Arthur J. Gallagher, detailed what owners and companies needed to consider when determining their insurance and risk management programs. K. P. Patel, CEO of Aarav Hospitality and treasurer for the 20,000-member strong Asian American Hotel Owners Association (AAHOA), offered his take on labor issues, insurance and getting better returns on investment with select service properties. Mark Le Blanc, senior advisor for New York City-based Rebel Hotel Company, captured the audience’s attention by stating his company’s philosophy was “a little contrarian,” had capital partners that “liked working with union hotels,” and announced it received a letter of intent on its first deal in California on the eve of the conference.
Even with so many ideas in play, everything brought to the stage added up to a pragmatic, comprehensive picture of what the hotel investing landscape in California looked like.
Current Ups and Downs
Throughout the discussion, coming to terms with the rising costs of operating a hotel butted up against the wisdom of finding potential in properties or situations other hoteliers could not.
“I can do a quick survey here,” Le Blanc said out of the gate. “How many people here today would buy a select service hotel if it was at a great price? How many of you would buy a union hotel at a great price?” Based on audience reaction, he affirmed, “(Rebel) likes to be where nobody else wants to be. Candidly, we think the big opportunities are in markets like San Francisco, which bottomed out based on good data that supports it. When you see potential where others don’t, it’s a nice place to be. For example, we closed last year on a hotel in New York City that had been shuttered for COVID and the owners lost their property to the bank. We'll be all in at $170,000 a key. Even with a labor union in place, we can do pretty well on this and potentially lease out the restaurant.”
Myer assessed that seller expectation is currently “out of line with what is reasonable in terms of acquiring financing and buying a hotel. You will have to see a shift in pricing and an adjustment in these price per room. Until this happens, we’re going to be in a low transaction mode. In 2021 and ‘22, we had the advantage of doing deals based on what a property was worth before COVID. With that three-year history, you’re going to have to look at markets and whether or not the deal will work based on financial projections. These are factors that make transactions difficult across the line.”
Kim stressed that a mix of expense and wage pressure tied to inflation were two of the biggest catalysts for profitability challenges between 2019 and the present. However, the aftermath of COVID is also playing a part, as has increased labor wages and hours required for things such as cleaning rooms more frequently. “(Labor) expenses have increased between 5 percent and 7 percent annually, while our revenue growth has been 3-4 percent,” he explained. “In a portfolio like ours, we had to make a lot of changes to keep within the same margin. With a lot of pressure on the expense side, we have not seen the demand or the price increases."
As owners of select service properties, there was a back and forth between Kim and Patel regarding tracking revenue per customer as well as how far customer incentives should go, especially in markets like Anaheim and Orange County, which remains a hot market due to tourism, conventions and a plethora of events like sports competitions. While “heads in beds” dictates the select service business model, extra fees for parking, service and “stay and play” guest offerings (where guests can pay for a late checkout and access to the property amenities) had to be devised with the customer perspective and high vs. low season in mind. Myers later noted that if an owner-operator can derive additional revenue through other areas, it can flow into the bottom line.
Although Myers acknowledged that California saw a roughly 56 percent decline in transaction volume on the investment front, he chalked it up to median price-per-room rates at record highs. “The market reflects a significant delta between seller’s expectation on price and buyer’s expectation. Interest rates have a negative impact on sales with expenses up,” he said. “We came off of 2021 and 2022 with a record number of sales, and sellers are now contacting us saying, ‘Hey, we're ready to sell. I'd like to get that price.’ However, you can’t borrow money at 5, 6, 7 or 8 percent interest and underwrite a deal at a 5 percent cap. The change in the value of the dollar means it’s more difficult for deals to work out.”
Reassurance on Insurance
The topic of protecting hotel property investments—specifically the exponential rise in costs—was so top of mind that it bled into other areas of conversation. Patel discussed the importance of securing federally backed insurance programs with government representatives as it was increasingly difficult for companies like his and Kim’s to independently attain it with conditions brought on in California by environmental change and recent disasters.
Collins adeptly stepped in at different points with sound advice:
- Talk to a trusted insurance broker about different ways to mitigate insurance costs.
- Implement loss prevention safety programs to lessen claims and lower insurance costs.
- Apply insurance to a conversation with a broker to determine if purchasing a certain property is right for the portfolio.
- With immigration and labor issues front and center, be mindful that carriers started pulling back on coverage in occurrences of human trafficking, abuse, molestation, and assault and battery.
“When negotiating your program, you need to make sure that your agent’s continuing to give you that coverage,” Collins said. “When it excludes abuse and molestation, it really (excludes forms of) assault, battery, firearms... the whole gamut of any kind of abuse.” However, not everything is doom and gloom.
“Everyone I know in the business has said 2023 was the worst property market ever in history,” she continued. “We saw increases... of up to 700 percent. The good news is that while renewal costs last year were up between 45 percent to 150 percent, this year as of January 1, they were more in the single-digit area. This sets the stage for a lot of what we'll see... single digit increases versus what we saw in 2023.”
Working Towards Labor Solutions
While rising labor costs are a big part of the increased costs of operating a hotel in California, paying the labor force fairly, providing solid benefits and establishing a good work environment remains a good investment of time and effort. Money may not be the number one reason people stick with employment, based on recent studies, other intangible issues such as advancement potential and good workplace culture could make it work.
Kim also touched on worker’s comp insurance in light of the fact that California had very protective laws to cover employees as well as the PAGA act (Private Attorneys General Act, authorizing employees to file lawsuits to recover civil penalties on behalf of themselves with the assistance of private attorneys), which he compared to “a class action lawsuit against the hotel”—which some unscrupulous lawyers may abuse.
Patel and Kim agreed that to stay on top of labor issues and others affecting hotel operation, owners and operators needed to be proactive and connect beyond the hotel or hotels’ management.
“You have to be plugged in with your city council members, chamber of commerce members and other local officials in addition to treating your employees well,” Kim said.
“Letting the next person (owner of a property) deal with it doesn’t work anymore,” Patel elaborated. “You need to make sure your interests are represented when reaching out to the government. If it’s your money, your property, your investment… it's also your responsibility to stay involved and make sure that your politicians understand what it takes to run a business in this state now.”