Last month while on a CapEx panel in NYC at the BDNY conference, the moderator asked each of us a final “speed round” question to close out the session. The question was “Given the current economic climate and evolving guest expectations, what do you foresee as the biggest challenges for CapEx in the hospitality industry over the next few years?” My reply was, “Two items: Lack of Capital and Lack of Human Capital”.

The 2023 ISHC CapEx Study found that the amount of CapEx funds needed to renovate hotels, based on the prior 10-year average for all hotel segments and ownership types, is about 8% of total revenue. For the last 3 years, since 2020-2021 peak COVID period, lenders allowed owners to use their 4% CapEx reserve to pay for anything necessary for their hotels to financially survive. Although the 2023 and 2024 improved key industry metrics have made for some positive year-over-year comparisons in both rate and occupancy, this has not been sufficient to allow most properties to replenish their CapEx reserves. Despite record high room rates for many markets, inflation is the ugly culprit hitting every aspect of a hotel’s operations and has consumed a lot of that increased revenue before it hits a hotel’s bottom line. Furthermore, over the last 5 years, overall FF&E product costs are up in the 15-20% range, while GC costs, materials and labor, are up about double that, in the 30-40% range.

As an industry, we are still "capital starved." Despite the Federal Reserve’s two rate cuts of .5% on 9/18/24 and .25% on 11/7/24, owners are still facing lending costs far above the levels of the recent past, as the Fed raised interest rates 11 times between 2022 and 2023 to combat inflation. Many hotels missed their scheduled renovations in 2019 and 2020, and today we have one of the largest gaps in recent history between owners' needs and their ability to execute CapEx plans. What will be the source of the needed capital? With "bid and ask" spread narrowing, election uncertainty over, and further rate cuts likely, most in the industry feel the transaction volume will recover and may even exceed the pre-COVID levels of property sales in the next 12-24 months. The new capital will take into account the necessary CapEx work and factor that into the Property Improvement Plan (PIP). With new ownership—and possibly changes in branding and management—these underfunded hotels will receive long-overdue revitalization.

For many hotels, the economics of what will be required to maintain the existing brand simply does not add up. Anticipating this need, the major brand families have provided owners “trade down” brands in the full-service segment for some time, and now they have introduced new brand options in the select service and extended stay markets, as many of these hotels are now well over 30 years old. This will allow some owners to "trade down," but stay in the overall brand family, and execute a PIP that may be 25-50% lower than the cost of maintaining their current brand.

As to the second part of my answer, regarding the "lack of Human Capital," the dearth of key people with the required experience and talent is as critical as the lack of cash. During COVID, and still today, staff reductions are in place for many project managers, architects, designers, and purchasing agents, as well as some of the major brands' design and construction departments. Although many of these firms retained the most senior and the most junior level of staff, the critical “job captain” staff position, the 5 to 8+ year experienced person that did the bulk of a project’s direct work is often gone. The lack of depth of many consultants' teams needs to be top of mind for all owners. As we have said many times, do not hire consultants based on a fee spreadsheet. It is critical to go deep into the due diligence process and determine if the prospective firm currently has the capability to deliver what the project demands in an accurate and timely manner. Do they have the depth and breadth to ensure their team does not miss a beat, or might a few staff departures or an extra couple of new projects overload their ability to perform? Smaller, start-up, full “work from home” firms have a place in the market and serve a niche. However, given the negative effect of any unscheduled displacement of revenue, it is imperative today to select firms with a deep bench of talent, the best industry relationships, and enough gravitas in their specific segment to solve problems quickly and mitigate potential schedule and budget impacts.

Just as smaller consultants can be suitable for specific aspects of a project, smaller vendors can work well for bespoke, lower-quantity FF&E items that are unlikely to disrupt room turnover or cause unplanned delays. However, for larger FF&E ticket items such as schedule-critical GC installed hardwired lighting, wall and floor covering, and selected casegoods for the guest rooms, the practice of selecting an unknown, or unproven vendor poses great risk. It is essential to prioritize vendors with the same depth and reliability you expect from your consultants. For vendors, this depth means financial stability and robust global sourcing of critical raw materials. The future is unpredictable whether it's a global pandemic, war, tariffs, or trade disputes, so overall resilience and flexibility are key.

Owners must work to reduce risk at all levels, from the design and purchasing team, through the selection of each vendor. Successful projects happen in all cycles, even during COVID with its unprecedented factory closures and record container costs. Once the CapEx cash is in hand, focus on depth in every member of the project team and each mission-critical vendor.

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