Baird – We attended The Lodging Conference last week (in person!) and met with our private industry contacts – owners, operators, brokers, and private equity investors, among others. Key takeaways from our conversations are summarized as follows.
Industry participants’ overall tone remains positive, but many appear increasingly focused on today’s risks and challenges. Industry participants remain optimistic regarding the broader recovery and the path to a more “normalized” demand environment; however, almost everyone acknowledged the relatively flatter trajectory that exists today, especially on the business travel front, compared to heightened expectations 90-120+ days ago. Also, we sensed an increasing focus on the risks that are present today: the sluggish business travel recovery, inflation/cost pressures, labor challenges, and underwriting and capital deployment difficulties.
Transaction market: still robust with lots of capital/participants chasing deals, but the froth has come off the top. Plenty of capital is on the sidelines looking for a home still – from traditional hotel investors, to more first-time hotel buyers, and now more real estate-focused groups that are interested in hotels given the record-high pricing in other real estate sub-sectors. Distressed deals are few and far between, and many prospective buyers have become frustrated with elevated pricing levels. Overall, the transaction market appears more balanced and to have cooled off a bit from earlier this year (i.e., the froth and bidding frenzy are not the same; less of a sellers’ market today). There are more assets for sale currently, which has lessened the scarcity premium from approximately six months ago, and some buyers are taking a more conservative approach regarding their view of the ramp-up in business travel.
When do urban markets get some love? We sense a growing (but still small) interest in urban markets, particularly as a contrarian bet given the strong buyer interest and pricing levels that persist for better-performing resort and drive-to leisure-focused properties. Overall, though, buyers remain focused on where the cash flows are higher and where the financing is more readily available and attractively priced (i.e., the better-performing hotels and market). Most industry participants believe it is still too early to bet on the more impacted urban markets.
Biggest risks in focus: labor, labor, and labor. Every owner and operator we met with cited labor challenges as a risk. There exists no easy or obvious solution to the labor problem other than to pay associates more; raising ADR as the offset in order to maintain margin is easier said than done though. Our industry contacts believe the “cost savings” that have been realized during the pandemic are not sustainable; guest satisfaction scores are slipping, business travel is gradually picking up (i.e., elite loyalty members expect certain perks), and brand standards have yet to be formally changed. The Delta variant was mentioned infrequently as a broader risk aside from the associated slower-than-expected ramp-up in business transient travel that has occurred in recent months.