ATLANTA—While the executives speaking during the “View from the boardroom” panel of the 2018 ALIS Summer Update felt the hotel industry still has plenty of opportunities remaining during this cycle, they are cognizant of the many challenges facing hoteliers.
The tailwinds from the tax cuts and corporate growth will propel the industry, said Kenneth Fearn, managing partner at Integrated Capital. The underlying tenets of the economy are strong, he said, as oil prices aren’t high enough to hurt travel and corporate spending continues to be strong.
However, he’s concerned about growing supply and the number of new brands coming out.
“I get worried now with the … proliferation of brands showing up and popping up on every corner,” he said. “At some point you get worried a little bit about the hotel industry becoming such a commodity as opposed to a real branded focus with differentiation. I can’t see it as clearly today as I did a few years ago.”
The public market certainly seems to believe there is more run relative to what demand looks like, said Mit Shah, CEO of Noble Investment Group. Hoteliers tell their lenders that supply has never driven a downturn, he said, and that’s true in certain markets, but in others it’s a little more challenging. He said the biggest issues in the industry relative to the economy are the inability to price demand, having to attract labor at any cost, property taxes incurred during hotel transactions and rising interest rates.
“When you include all of that together, it certainly doesn’t give a tremendous amount of comfort of where the opportunities lie, but as long as demand holds up, there does become this ability where you can kind of rationalize how profits can be generated,” he said.
Champ Patel, CEO of Champion Hotels, cited an article he read about building homes in Oklahoma. One builder said construction cost increased 40%, particularly because of the price of wood, and the company was going to lose money on the house because of the price at which it was being sold.
“We’ve slowed down, too, now,” he said, explaining in previous years the company has built 10 to 12 hotels per year but will likely reduce development to three or four properties annually.
Transactions and M&A
Consolidation within the hotel industry will continue, said Pat Pacious, president and CEO of Choice Hotels International. There are still some standalone brands struggling with the cost of customer acquisition—among other costs—that needs to be reduced.
“If you look at the world, only 27% of hotel inventory is part of the six largest chains,” he said. “I do think the brands have a lot of room to grow from that perspective.”
Noble has been a net seller over the past 24 months simply because there isn’t much on the market, Shah said, and pricing has been beneficial for net sellers.
“We think that’s something that could be pivoting over the next six months,” he said.
Integrated Capital has been a net seller as well, with no new acquisitions within the last 18 to 24 months, Fearn said. The structural obsolescence of existing hotels is much quicker now, he said, and more people will invest in select-service hotels quicker as people gravitate during downturns to the newest projects.
The nontraded space will play a part in the industry over the next couple of years because of the thirst for yield in every way, shape and form, Shah said. There’s so much capital that’s there, he said, but it’s focused on scale and revenue per available room over $100, so it’s not for everyone. One exception to that is the new real estate investment trust CorePoint Lodging—birthed by La Quinta Holdings—that is focusing on hotels achieving less than $100 in RevPAR.
“The public markets don’t know anything about it because they’ve been RevPAR snobs in general,” he said. “Summit (Hotel Properties) went public at $55 (RevPAR), and today they’re at $122. They’ve been going through that process, not because they didn’t make a lot of money at $55—they made a lot of money at $55—it’s just that’s kind of the gravitational pull of what happens in the public markets.”
Value of a brand
Consumers don’t want the cookie-cutter experience, Pacious said. When they book a hotel, they want to know what market they’re in. With its Cambria New Orleans, the design, beer and art are all locally inspired, he said, and Choice’s Cambria in Nashville, Tennessee, is all about country music, complete with a stage in its lobby.
“You’ve got to look to the developer to come in and help the brand adapt to the marketplace,” he said. “The beige box is long gone.”
Integrated Capital has gone back and forth on brands, Fearn said. It purchased an unflagged 491-room hotel in Myrtle Beach, South Carolina, with 31 acres and a quarter mile of private oceanfront land about two years ago, he said, and the company deliberated on what to do with it as the major brands were knocking at its door. In the end, the company chose to make it a DoubleTree by Hilton.
Having a brand attached to a property is a comfort to lenders, particularly because of their reservation systems, Fearn said. Consumers aren’t as attached to brands now, he said, as the internet has been a game-changer by giving guests access to everything.
Now his company is looking at soft branding or independents, Fearn said. While he appreciates the power of the brand, when he looks to his own children, they have no loyalty to the brand.
Pacious said Choice’s stable of 11 brands gives it some freedom.
“When you have 30 brands, you have to differentiate them on some things that no longer make sense for owners,” he said. “That’s the challenge of getting too big. It might make sense for the brand manager, but not for someone at the ground level.”
Having too many creates ambiguity of what the brand is and what it stands for, he said, and brands can get too caught up in getting bigger for the sake of getting bigger.
“If I already have them in house for Comfort or Cambria, I don’t need to acquire brands sitting on top of each other,” Pacious said.