HM on Location: Guests can expect to pay higher rates, but that doesn't mean better service

PHOENIX — Hotel customers can expect to continue to pay higher room rates, but their service expectation should potentially not be as high. A pervasive labor shortage that doesn't appear to be subsiding is forcing hotels to do more with less staff and that oftentimes means that guest will have to temper their service assumptions.

Hotel rates continue to be buoyant, giving cover to hoteliers dealing with an escalation of costs across the operated and undistributed departments. According to STR, average daily rate is expected to reach $148 in 2022 and $152 in 2023, leading to revenue per available room of $98 in that year, a 14 percent increase over 2019. RevPAR gains are being fueled by higher rates as hoteliers sacrifice occupancy. Higher rates, however, come with their own obstacles.

"It's a challenging aspect to handle," said Keith Pierce, EVP and president of franchise and development at Sonesta International Hotels Corp., during The Lodging Conference, here at The JW Marriott Phoenix Desert Ridge. "Rates are increasing, but we don’t have the labor force, so service is an issue. We are asking for a higher rate, but delivering less service to the guest. That elasticity will break at some point and guests won't pay."

The strong rates that hotels are charging are one of the biggest things propping up the hotel industry now and during the pandemic, supported by leisure travelers who were more than willing to foot the bill. As summer gives way to fall, and corporate and group business trickle back, the dynamic could change, said Mark Lomanno, partner and senior adviser at Kalibri Labs. "ADR is leading the recovery, not demand, but it will turn into a more traditional recovery." That's because ADR will plateau as the business mix changes. "When corporate business comes back, they are much tougher negotiators on rate than leisure travelers," Lomanno said.

Added Mit Shah, CEO of Noble Investment Group, "The question is: Can we move pricing power as spending slows and interest rates go up?"

Recession Worry

The seemingly good news coming out of the hotel industry is strangely complemented by the specter of a recession just around the corner as the Federal Reserve continues its effort to slow the economy by raising interest rates, which were bumped up another 75 basis points this week. "I interact with investors every day and this is the first time in 25 years that I'm talking about recovery and recession at same time," said Justin Knight, CEO of Apple Hospitality REIT. 

The headwinds blowing against the hotel industry are many and all too real, from inflation and supply chain to labor and interest rates. They are wreaking havoc on hotel operations, but in some cases also presenting opportunity for some investors, like Tyler Morse, CEO of MCR, whose portfolio includes the highly lauded TWA Hotel at JFK Airport in New York. His company acquired a total of 60 hotels during the pandemic. "Leaders make tough decisions," he said. "When others go left, we go right. In the third week of the pandemic, we looked at each other and said, 'This is when we should be buying.' We went right."

It's still not easy to transact deals in this climate, said Greg Friedman, CEO of Peachtree Hotel Group. "The debt markets are tightening up—it’s getting tougher," he said, "with less debt capital available."

Friedman sees a better opportunity to buy assets next year as loans mature and hotel owners look to exit. "There are not a lot of trades now, but debt maturity is coming that will start putting pressure on assets," he said.

There still remains a ton of liquidity chasing assets now, said Joe Berger, president and CEO of BRE Hotels & Resorts. "It makes buying hotels quite difficult because of the competition. You have to have conviction of where you want to take an asset."

Not According to Plan

In a sign of an upside-down market, normal and dependable trends are not playing out accordingly. Typically, for example, a jump in interest rates is accompanied by a rise in cap rates. Not so this time, said MCR's Morse. "It's not happening," he said, noting that in 2006, the 10-year treasury was at 5.25 percent and people were buying hotels at a 6 cap rate. "In good and bad markets, there is a flood of activity, so cap rates won't float up."

It might be all for not if the hotel industry can't get control of the labor situation, which doesn't appear to be easing. "Immigration will ultimately fix this," said Mike Deitemeyer, president of CEO of Aimbridge Hospitality, one of the largest third-party management companies in the world with around 1,500 hotels. In order to staff hotels, the company has used clever options, such as turning to the gig economy to fill roles, moving people across hotels and offering spot pay.

But just getting employees into the door and retaining them is proving difficult as the hotel industry competes with adjacent industries, from retail to fast-food, which is pushing wages higher. "If you pay enough, you can get positions filled," said Arash Azarbarzin, CEO of Highgate. "We are having issues in remote locations where people aren’t available. It's easier in urban markets, such as New York, where Highgate operates many hotels."

It's an issue that won't be solved overnight and one that is becoming a nightmare for hoteliers. "We are playing a dangerous game with workforce dynamics and it's having a negative impact on major investment markets," said Gilda Perez-Alvarado, global CEO of JLL Hotels & Hospitality. "All the currents are against each other, labor unions are not cooperating and guest needs are changing. It's eroding margins and we are nowhere on immigration. So we are stuck and that impacts valuations."