Hotel Outlook: Far From Gloom And Doom
GlobeSt.com: Where do you see the hotel business headed in the latter part of 2016?
Steve Van: To be honest, it depends on where you are sitting on the hotel cycle rollercoaster. The short industry-wide answer is that the coaster is headed down, down, down. But there are market-to-market differences depending on where you are “sitting” on that coaster. For those sitting on the back row of the coaster in San Francisco, for example, things are actually still going up, with a 10.7% RevPAR increase so far this year. If you are on the front row of the coaster in New York City or Houston, however, you’ve already crested the first hill and are on the way down, with a respective 3.9% and 7.0% decline in RevPAR so far this year.
So everyone has a different view, and given the disparity between those numbers it’s easy to see why. But ever since the first recorded recession in history (in 2,300 BC in Ancient Sumeria) there has always been another recovery in sight–and yet another recession over the horizon–and we know from long experience that no economic rise or fall continues indefinitely. Nationally year-to-date RevPAR is up 2.2%, but is slowing, group is down 1.8% in the Top 25 markets and oil markets are tanking. Add to this the first flood of $18 billion in 10-year vintage 2006 and 2007 CMBS loans coming due at the same time that new loan issuances have decreased 40%, and it’s tough to avoid the conclusion that no matter where you are sitting on the rollercoaster, there will be a downturn in the not-too-distant future.
GlobeSt.com: Are you seeing any big changes in the industry that will affect profitability and value?
Van: Absolutely. Two in particular come to mind. One is a new issue entirely, and another is an old and familiar concern rearing its ugly head.
The biggest change is the heavily increasing importance of online reputation. It has become as important as the overall brand perception, itself. Almost everyone–the number is around 80% nationally, I believe–conducts online consumer-based research prior to booking. Even point addicts participate in the point-and-click ritual before booking a stay. Whether you are a multi-program junkie (a combination of Hyatt Gold Passport and Hilton Honors for example) or a monogamous point junkie (Marriott gets all your business) the strength or weakness of a hotel’s online reputation strongly affects consumer choice. TripAdvisor rankings in local markets can determine whether a customer books a Hyatt or a Hilton in the first example, or perhaps books a highly rated Renaissance over a lower rated Marriott in a different local market. Owners mustpay attention to how their management company handles online reputation or they will lose value. And that loss could be significant, with a very tangible and persistent impact on the bottom line numbers. JLL recently announced they will use guest sentiment analysis gathered from over 150 review sites in evaluating asset performance and investment opportunities.
The other, more traditional, area experiencing big changes is rising costs. Wages are going up, especially in areas with a $15 minimum wage, and the DOL salary threshold for exemption will double in December. And turnover is costlier than ever. Additionally, even though brands like Hilton are making progress limiting costs from online agencies like Priceline, Orbitz and Hotels.com, the overall trend-line is that the cost per acquisition keeps continuing to rise.
GlobeSt.com: What can owners do to cope with and accommodate those two changes?
Van: What we find to be most effective for our owners is to make sure that we are keeping our employees happy in order to reduce the high cost of turnover. The ROI for employee satisfaction efforts is strong, and prioritizing employee happiness can have a real impact: the big brands usually average around 80% employee satisfaction on the standard industry survey, and last quarter we did 93% companywide. That’s primarily because we have proven proprietary programs in place to keep our employees motivated, engaged and staying with us, which ultimately results in less turnover and lower costs for our owners.
GlobeSt.com: It sounds as though the hotel industry is in for some belt tightening. Is there any good news in the future for hotels?
Van: Yes, plenty. It’s far from gloom and doom. For well-capitalized acquirers who are not afraid to get in early, there will be terrific opportunities for quality hotels in need of recapitalization. One CMBS Special Servicer has seen troubled loans increase tenfold (that’s 1,000%!) in the last 90 days. And in the long term, of course, as the world continues down the path to globalization, a dramatically expanding middle class population in countries like China will continue to add to a growing population of travelers–many of whom will certainly want to visit and spend time and money in this great country of ours.