So, What Are You Seeing?

At this year’s Americas Lodging Investment Summit, the opening question in almost every conversation I participated in was “what are you seeing?”

This opening is a good indicator of how industry participants in hotel real estate are feeling. Everyone is just making sure they are not missing anything, but right now there does not seem to be much to miss.

The mood seems to be clearly bifurcated: Operators are pretty happy, 2022 was a stellar year and the forward-looking data for 2023 is healthy. Sure, CoStar and STR are forecasting a recession in the second and third quarters, but nonetheless, we also forecast revenue per available room growth, which is unprecedented in our 30-year tenure.

The results in 2023 will be driven by a very strong first-quarter performance. This is due to the easy comparable with the first quarter in 2022, which was affected by the spike in infections from the omicron variant of COVID-19. The remainder of the year shows slow growth, but in a recession I think we take any growth we can get.

Pat Pacious, CEO of Choice Hotels International, characterized the demand drivers for his company as the Three R’s: remote work, retirement, and rising wages. The trend to remote work that most of us are living now was echoed by Chris Nasetta, CEO of Hilton, when he talked about his expectation that things will normalize, but remote work will stay. And for most hoteliers, the hope remains that the trend of WFH does not mean work from home but work from hotel.

The extended-stay segment is uniquely positioned to capitalize on this trend; in reality many players are already pushing hard into this space. Greg Juceam, CEO of Extended Stay America, mentioned that new supply in the segment has grown 40% over the last few years, but he was not particularly worried since demand has grown 43%. He all but invited other companies to enter the extended-stay market, and, according to the rumor mill, Hilton is actively developing an economy extended-stay brand. This segment will continue to be attractive to owners and developers, so expect more news.

The dealmakers and brokers on various panels at ALIS sounded a cautiously optimistic tone. According to CoStar data, the 2022 total sales volume topped $44 billion, and the last three quarters show successively better results. If a mild recession can lead to a taming of the inflation numbers, an interest rate cut from the Federal Reserve Bank is not out of the question in the later part of the year and that then may fuel sales as we enter the later quarters. When talking about what trades to expect, my favorite quote came from John Bourret of Eastdill Secured, who summed it up succinctly: trophies and trauma.

In other words, high-end trades, such as last year’s Montage Laguna Beach of the Four Seasons in Phoenix or Jackson Hole will likely continue. But on the other hand, as one panelist on the Wall Street panel quipped: People who kicked the can down the road are tired of kicking the can down the road. This means that refinancing their debt will be on a lot of owners’ minds, and given the high interest rate environment, this may cause some trauma. Around $30 billion in commercial mortgage-backed securities debt, or CMBS, is coming due in the next two years, and it is probably fair to assume that much of it was financed at roughly half of today’s interest rate. Trauma, indeed.

It was good to see that Chip Rogers, CEO of AHLA, tackled the lack of labor — the main issue for operators — head on, and devised a non-partisan message that focuses purely on the availability of labor while side-stepping the contentious issues of citizenship and secure borders. Let’s see if a conversation can be had that focuses on one and not the other two.

Lastly, I was once again underwhelmed by the lack of commentary on the impact of climate change on hotel assets. Rising sea levels, stronger winds, too little or too much water are topics that should be part of the conversation when we talk about hotels. Unfortunately, the limited investment time horizon gives many owners comfort that this will be someone else’s problem, or that the insurance companies will pay once a climate-related event happens. I just wish that investment conferences offered more opportunity to share best practices and learnings about a topic that will affect more and more investment dollars in the future.

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