WASHINGTON — As the hotel industry has made its way out of the worst business and economic conditions in recent history, hoteliers continue to adapt to the new environment amid some struggles.
During the "Views from the Boardroom" general session of the 2024 ALIS Summer Update here, hotel executives outlined what's challenging their companies and what's driving ongoing demand trends.
Working Through Challenges
The current economic environment remains challenging because of the cost of capital and the yet-to-appear interest rate cuts, said Evens Charles, founder and managing principal at Frontier Development & Hospitality Group. The growth of revenue per available room looks promising, but even so, it’s tough to make deals pencil.
Despite those conditions, Charles said there are opportunities in all economic environments. Now it’s about cultivating the creativity to find the deal value and the relationships his company can tap to find a diamond in the rough.
That doesn’t mean adjusting return expectations, though, Charles said. He added that if he can find the right basis to absorb higher construction costs and the higher cost of debt, that’s a deal he’ll likely pursue with the hopes the capital markets will improve when its time to refinance.
Hoteliers have to separate the top line from the bottom line, said Danny Hughes, executive vice president and president of the Americas at Hilton. Based on the top-line revenue, things look strong. Even if there’s been a peak in leisure demand and it’s slowing a little, group demand is still on fire. Even hotels that don’t have space for groups benefit from group business in a city because of the ripple effect it creates. Business travel is coming back, and hotels have started request-for-proposal season.
“But there's no doubt, if you go to the bottom line, cost of capital and operating costs are challenging,” Hughes said. “There are still very, very steep increases in labor, less flexibility, cost of goods — so it's a challenging environment at the bottom line right now despite a strong top line.”
If he were to just look at the whole portfolio, Waterford Hotel Group President Michael Heaton said he’d categorize things as generally being OK. Drilling down into individual properties, however, would garner asterisks.
“The roll-up of the portfolio looks good,” he said. “You can compare it against different year-over-year metrics, and I think it’s hiding some of the challenges that are in some of those particular markets. … If I just rolled up the portfolio, I’d probably sleep well at night because it looks good, but the devil’s in the details and markets are very disparate.”
Managing the bottom line is tough enough, but hoteliers must have their revenue management in line because if they lose the top line, it’s going to be tricky going forward due to rising expenses.
Playa Hotels & Resorts’ properties in Mexico and the Dominican Republic are doing well, but Jamaica is challenging, Playa Chairman and CEO Bruce Wardinski said. The reason is because the U.S. Department of State recently put out a travel advisory on Jamaica and the Bahamas. The U.S. government can wield its power when it wants to punish another country, and it’s doing that here because Jamaica and the Bahamas were doing business with China, he said.
“The United States has a very big bat, and they can whack people down when they want to,” Wardinski said. “The Jamaicans are never going to tell you that, but I can tell you that.”
Demand Trends
Business travelers make up the vast majority of Hilton's nearly 200 million Hilton Honors loyalty program members, Hughes said. They’re earning points, and they want to redeem their points, which is why Hilton has been buying and partnering with other companies to open up new experiences.
Hilton now connects with Small Luxury Hotels of the World, which has a strong presence in Europe, not as strong of a presence in Asia and is in its infancy in the U.S., he said. After making these hotels available through Hilton, there have been thousands of bookings, and the vast majority were on a redemption basis.
“It’s actually proving the model,” he said. “It’s allowing people to have the opportunity to redeem them.”
Hilton saw something similar with Nomad, Hughes said. The company has two strong brands in the luxury segment, Waldorf Astoria and Conrad, which each have their own build standards and offerings. The company’s development partners have said if Hilton had a great lifestyle brand, they have destinations for it, both as a new-build and conversion project.
“Nomad’s a brand that really punches above its weight,” he said. “It’s not a big brand now, but everybody knows it, and it will be bigger and bigger.”
Playa’s investors were concerned a few years ago about the leisure bubble during the pandemic and its recovery, Wardinski said. The drive-to destinations in the U.S. saw leisure demand start to wane, and there was concern leisure demand would drop off at all-inclusive resorts, too. But it didn’t.
“The reason it hasn’t gone away is we never really over-earned during [the pandemic],” he said.
The guests who traveled to Playa’s resorts during the pandemic and the recovery had a strong desire to travel because it required getting on a plane, Wardinski said. Then when restrictions started to loosen a little, the company’s guests couldn’t go to Europe, Asia or South America, but they could go to Mexico and the Dominican Republic. These travelers had high incomes, and Playa has been able to retain them.
U.S. travelers want to travel internationally to Europe, just like last summer, he said. Americans also like to travel in the winter, and that’s when they prefer beach destinations.
“We’re in a great location, but it’s a little slower in the summertime, so when the price becomes more of an issue, it’s a little more challenging,” Wardinski said. “But when price is not an issue, it’s at the upper level of the leisure traveler. The demand is very, very high.”