From inflation to rising interest rates, there are a number of macroeconomic challenges that are currently impacting many aspects of the lodging industry making it difficult for hospitality executives to project future performance as we close out 2022 and look ahead.
During the recent BITAC Owner’s event taking place in Key Largo, FL, a handful of executives weighed in on a number of these issues during a panel entitled “Executive Insights: Hotel Leaders Assess Industry Outlook For ’23 And Beyond.”
Daniel Dolce, SVP, development, M&R Hotel Management, put the current conditions in context.
“We’re right in line with the economy. The hotel industry historically is always in line with the economy. When the economy is doing well corporations are spending and hiring. People have discretionary income and go out. When the economy is doing poorly they stop hiring, they stop doing off-site meetings, they don’t train and they pull back,” he said.
Martin Thornros, principal, Convergent Services, suggested the financial outlook could get worse before it gets better.
“I think there will be more inflation coming along. I hope it’s going to start going down in the second quarter of next year, I think that would be a good outcome,” he said.
Derek Sylvester, principal, Gulph Creek Hotels, acknowledged the impact of interest rates, particularly in the wake of the midterm elections.
“It’s interesting to see interest rates go up as predicted. I thought there might be a political connection where perhaps the current administration would be able to mediate some of that that bump to three-quarters of a point, but obviously that didn’t happen. So you wonder what kind of impact does the political situation have?” he said.
Dolce further detailed the impact on new product coming to market.
“With where interest rates are now development is coming to a crawl because people can’t get things financed with the debt community. For me it’s not political, it relates to less regulatory actions that maybe reduce interest rates and create more debt for people to go out and develop,” he said.
But there are plenty of political concerns as well, according to Roger Bloss, president, Alternative Hospitality, who noted he is concerned about “how these different governments impact what we do and how we travel” as it relates to COVID and other geopolitical issues.
Bloss added, “to me the biggest issue is getting some consistency in our government and global governments as well. You look at China right now, they’re locked down. You look at other countries that we look at doing business with, they’re locked down. We don’t know what’s on the horizon,” he said.
There hasn’t been much on horizon with regards to hospitality transactions, which have slowed considerably in the past several months, also in part due to rising interest rates.
Doug Collins, Chairman and CEO, Hospitality Lodging Systems, noted there has been a paradigm shift.
“I do think the whole dynamic of buying and selling hotels has changed tremendously. If you’re paying a 3 percent mortgage as opposed to 4, 5, 6, or 7 percent that increases substantially what the cost is. We’ve had a big disconnect between the buyers and sellers in general,” he said, adding that in markets like Atlanta “there’s virtually no hotels for sale.”
“I think it’s kind of dried up because the debt is very challenging to get right now. The financing terms are out of line so it becomes challenging from that point of view. There’s not much going on in the market and it’s also become very difficult from my point of view to measure the value of a hotel,” said Dolce.
“I don’t necessarily think buyers and sellers are unrealistic about their pricing, I just think the combination of the PIP costs, construction costs being up 35 percent and interest rates up potentially in the 9 percent range makes it very difficult,” said Sylvester.
He further added there could be some distressed assets coming to market, but that has yet to occur.
“We’ll see over the next 6 to 18 months if sellers are sort of forced to unload because the pressure from brands to upgrade their projects is forcing them to sell and discount the price. We’ve yet to see that perhaps we will see that in the first or second quarter of next year?” added Sylvester.
Bloss made this prediction in terms of acquisitions.
“I think you’re going to see a lot of private equity come out. There’s a lot of dry powder on the sidelines. I think you’re going to see more cash buyers but they’re going to wait to pounce on the right opportunity with their cash,” said Bloss.
Technology, meanwhile, continues to take on an increasingly important role in the wake of the pandemic and progress has been made, according to Thornros.
“For a number of years there was very limited advancement in technology in the industry, but here the last few years there has been a lot of work done. The integrations between various systems is becoming more and more critical, not only from an operational standpoint but from a functional reporting standpoint,’ he said.
“I think you’re going to see technology come wherever there’s a labor issue,” added Bloss.