(Corrected on July 19 to amend a source's title in the ninth paragraph.)
NEW YORK — Optimistic for the first half of the year, the overall mood in the U.S. hotel industry has been dampened by concerns over inflation and interest rate increases.
Hotel executives speaking during the “Fiscal Fitness – Where Hotels Stand in the Current Economy” panel at the ALIS Summer Update conference in New York said that while there are reasons to be concerned, the hotel industry's long-term path is steady.
In one word, Hilton Chief Financial Officer and President of Global Development Kevin Jacobs described the hotel industry as "fragile."
He said all indicators show a strong U.S. economy with high consumer savings and corporate earnings, but much depends on how the Federal Reserve will act.
The U.S. has been through 13 years of quantitative easing, creating a lot of capital that is still available to be deployed. Now interest rates are going to be higher than they have been in a long time, and the Fed is doing quantitative tightening, something most everyone is unfamiliar with, he said.
“So, no one really knows what’s going to happen,” he said.
Jacobs said he was debating with MCR Chairman and CEO Tyler Morse before the panel how much resolve the Fed would have to keep on its current path. They both believe the Fed doesn’t have as much resolve as people or the markets think it does.
“There’s a lot of different ways it could go, and I don’t think any of us really know how it’s going to go,” Jacobs said. “It’s like you have the Wizard of Oz and you have people with their hands on the dials and the wheel and that can change things.”
Avion Hospitality Group Chief Investment Officer Lynne Roberts described the environment as turbulent. The consumer price index grew 8.6% in May and 6% in June, but there is uncertainty on whether inflation can be controlled or a recession is looming, she said.
“There’s a lot of spinning plates with manipulation of the economy, which at this point has been in this situation since the ’80s,” she said.
The way to get through the turbulence is to take a contrarian view and place some bets, Roberts said. Solving problems through creativity will allow hoteliers to create opportunities to grow, she said.
Anyone can make money investing in a zero-interest rate environment, Morse said, adding it would be terrific if it becomes like 1974 again with hyperinflation and 14% interest rates.
“All the mores that we’ve been using for the past 20 years have gone out the window, and you’re going to have to take real risks, you’re going to have to have guts and you’re going to have to have a very well-executed strategy,” he said.
People could have made many mistakes over the past 20 years and still done well within the low-interest-rate environment, but that won’t be the case over the next five years, he said. While he doesn’t expect interest rates to keep rising at the previously indicated pace, he said rates will rise until enough pressure builds to lower them.
In an inflationary environment, hotels are the greatest asset class to have, Morse said. Average daily rate growth through the 1970s and 1980s were “astronomical,” he said, and that all dropped to the bottom line. Wage rates caught up after that.
“It’s going to be a very harrowing period, and I think some people are going to get flushed out of the game,” he said. “And that’s OK because the game has been too easy for too long.”
It’s important to remember the hotel industry is a good business to be in, Jacobs said, adding that while there’s been a lot of hand-wringing over return-to-office issues, video meetings and the interruption of business travel, people have shown time and again that if they are able to travel, they will.
If travel becomes a combination of business and leisure, the hotels can handle it, he said. If business travel goes back to how it was before the pandemic, that will work, too. Even if there is a recession, that ultimately won’t matter.
“Every piece of information you look at, every demographer, anybody who studies the ebbs and flows of population growth, suggests the middle class can continue to develop around the world,” he said. “There’s going to continue to be economic growth over time.”
For hotel operators, pricing power is a key consideration, Roberts said. Her company raised rates and has held rates, and the cash flow has been fantastic, she said.
She said she had the opportunity to evaluate other industries, including residential, senior living and storage, and she found hotels have the strongest return. The return profile of other industries is weak by comparison as they’re not generating a lot of money.
That rates are so high now leads to questions over whether the model is sustainable, she said, noting a labor shortage is one factor behind inflated profitability.
Sustainability depends on the time period being measured, Morse said. There are investors who aren’t playing the long game. Hotel average daily rate in New York City was $35 in 1985, but before the pandemic, it was nearly $300, he said.
People love to travel, and they’re going to continue to love traveling, he said. Even if people don’t want to return to the office because of COVID-19, they’ll take a vacation. Flights to Europe are packed, and the airlines are charging a fortune.
“We're in a terrific business long term,” he said.