The ALIS conference took place this week, bringing downtown LA hotels to life with optimism and hope that normalcy for the hospitality industry will return in the not-so-distant future. Here are some collective take-out meals from our team who were present.
- The recovery remains a sub-market story, with no overall trend driving the performance of the country as a whole and little consistency in recovery from one market to another. Some markets are experiencing a strong recovery and are performing at or above 2019 levels, while others are lagging behind. The recovery is not only underway in leisure-oriented markets; markets with sources of heavy industrial / warehouse / logistics demand also improved. Secondary / tertiary markets are recovering more quickly. Once the lagging submarkets gain momentum, they will overlap with the already recovered segments, and the overall recovery is expected to continue its momentum.
- While many believe the latest RevPAR growth is temporary and caused by summer leisure travel, ultimately the recovery follows different patterns in different submarkets.
- Booking windows are short, so there is little visibility into future bookings at this time in markets that are heavily dependent on group demand. Therefore, there is a lack of clarity as to when group / business travel will return for good in certain markets. Big box hotels in the CBD are still struggling and many can become distressed.
Capital markets and transactions
- There is much more capital than the product currently available. Buyers focus on high-end hotels and long-stay hotels, and capital typically focuses on more opportunistic and higher-return strategies.
- The market becomes more efficient at placing buyers and sellers (a shorter list of investors is offered assets).
- There were more off-market transactions than fully-market transactions. Brokers have silent / targeted marketing processes in place, so buyers really need to look for deals.
- Finding assets to buy at a reasonable price continues to be difficult as asset prices remain high and the transaction market is extremely competitive. The large amount of capital raised to acquire hotels exerts upward pressure on prices, and the risk of a recovery in hotel performance does not appear to be factored into the purchase price of certain transactions. Buyers expect to see more opportunities coming online in fall / winter 2021, as lenders become less accommodating to borrowers and the need for capital for home renovations and improvements increases.
- Ceiling rates continue to be pushed down.
- Some still believe that we have not yet seen “the film is fully played” and that other distressed assets may start to enter the market as lenders lose patience and understand that the recovery may take longer for some assets / submarkets.
- Greater “market compensation” is expected through special service forbearance offers and federal subsidies from CARES I & II that burn, leading to restructuring or additional sales.
- Upscale hotels and extended stay hotels in some markets driving high RevPAR penetrations lead to valuations above 2019 levels and in some cases above current development costs given market liquidity . In addition, there is a great interest in Hilton or Marriott hotels with selected service or for long stays in good markets. Most don’t expect a “COVID reduction” for these products.
- Borrowers are prepared to shoulder today’s high cost of short-term debt with the anticipation that looming inflation will push income and asset values up. For some, this comes with the assumption that the cost of long-term permanent debt will remain low for the foreseeable future. However, others expect that as inflation rises, interest rates must also rise, and many wonder what impact this will have on the market, valuations and transactions.
- We continue to see more alternative forms of debt from sources that have traditionally been active in equities.
- Hotels have become more attractive than other asset classes, such as offices / retail, in particular for their ability to hedge against inflation due to daily ADR adjustments (unlike long-term leases).
COVID Delta variant
- While this is a concern, most believe it won’t be as big as you might expect. The belief is that the current wave will soon subside and become a non-issue, and the recovery will continue.
- The buyers we have met are always aggressive when it comes to underwriting and trying to win contracts; they don’t really buy into a further downturn.
Challenges related to labor, construction costs and inflation
- The biggest challenges are operational and labor issues. Some hotels limit bookings to midweek so that there are enough staff available to maintain the hotel during the weekends, when premium rates are reached. Another strategy is to price single night stays at rates that essentially convert business bookings into multi-night bookings.
- Labor issues affect hotels in all segments and markets and are the number one concern of owners and operators. Some employees are available but do not want to work before the expiration of federal unemployment benefits. Still, operators are starting to see light at the end of the tunnel, with unemployment benefits provided by the federal government expiring in September. Wage rates are increasing by 10-25% in many markets as hoteliers compete with other employers offering higher wages and better benefits. Increases in labor costs are expected to continue even when the labor force has fully returned. A significant portion of the hospitality industry employees have left the industry and will need to be replaced by new recruits.
- New technologies driven by artificial intelligence combined with mobile applications should allow hotels to operate more efficiently and with a reduced workforce.
- Construction costs have increased by 10-15% between the cost of materials and labor.
- Inflation puts pressure on the costs of wages and supplies.
- There was more discussion throughout the panels on sustainability, corporate responsibility and community orientation. More and more groups in the panels are examining the importance of looking at investments in a holistic way, rather than just focusing on income / profit.
- Most participants were cautiously optimistic. As fewer deals were done at ALIS this year, certainly everyone was happy to be able to connect in person again.
Many thanks to Suzanne Mellen, Luigi Major, Eric Guerrero, Emil Iskandar, Dan MacDonnell, Kirsten Smiley and John Berean for their contributions to this preview.
Rodney G. Clough
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