Hoteliers still have doubts when it comes to the economy and the state of the industry, but see growing optimism regarding the new administration.
EAST LANSING, Michigan—An uncertain economy, not possible policies and actions of President Donald Trump, is what concerns some hoteliers in the United States.
During a recent panel discussion at a meeting of the Michigan State University Real Estate Investment Management Advisory Council, executives said they worry about a number of broad economic issues that might affect their businesses.
“Right now, we see the economy as being rather choppy, versus two years ago when it was clearly in a positive direction,” said Mark Laport, president and CEO of Concord Hospitality Enterprises. “Last year we saw a real slowdown, and some markets even went backwards. And we’re seeing the same thing this year on a market-by-market basis.”
Some panelists, however, believe Trump’s actions to reduce business regulations could have a positive effect on the economy and the hotel industry.
“The reductions in regulations are real and material,” said Ryan Meliker, managing director and senior real estate investment trust analyst at Canaccord Genuity. “Many industry leaders in the broader economy are much more positive about the idea of no new regulations as a tailwind for business investment. If we see more business investment, we’ll see more (gross domestic product) growth and that all leads to travel spend across the U.S., which is good for the hotel industry.”
The Trump administration’s attitude toward labor issues were also a reason for optimism among some panelists.
“Under the (President Barack) Obama administration, the bias was pro-union as was the attempt to link the franchisor to the franchisee, giving the franchisor responsibility for the behavior of franchisee employees,” said John Keeling, EVP of the Valencia Group. “We also had the question of the proposed overtime rule, which was really a conundrum for the hospitality industry because in some cases we had to kick people who were managers out of management. The elimination of these two issues takes a lot of uncertainty and (negativity) out of the industry. If nothing else happens, the hotel industry is better off today than under the previous administration.”
Laport said international travel to the U.S. is generally down, but he wasn’t sure it was a result of Trump’s orders to restrict incoming travel to the U.S. from certain countries. He said the effect has been mostly felt in major coastal markets.
“Miami, for example, is a gateway market in which business has been down, largely from a downturn in international visitors,” he said. “The effects are mostly in major gateway cities. If, on the other hand, you look at a market like Columbus, Ohio, you can’t tell that anything is happening.”
Tim Marvin, EVP of the Hotels & Hospitality Group at JLL, believes the strength of the dollar is the primary culprit in the decrease in international travel to the U.S.
“It’s had as much an impact on the softening of international travel as anything has,” he said. “Right after the Trump proclamations, there was some fear and we saw some early-warning stats that were frightening in terms of search for travel to the U.S. But that’s stabilized, and that initial fear has subsided.”
Financial markets are still solid
The panel also discussed other industry issues, including the state of hotel financing and development. The mood was mostly positive toward the availability of financing to buy or build hotels.
“I don’t know what the future holds, but in the current climate balance sheet lenders and the debt funds and even some international lenders are coming into play, as well as (commercial mortgage-back securities),” said Jason Rabidoux, VP of business development, West Coast, at Davidson Hotels & Resorts. “Between all these different paths, the flow of capital from a debt standpoint has been pretty strong.”
He said pricing and terms have also been favorable, with 70% to 75% loan-to-value debt available for “the right story.”
Laport said while the availability of credit weakened in the fourth quarter of 2016, it’s become more plentiful so far this year, with a caveat.
“Just a few months ago as we developed a new hotel we would reach out to five or six lenders and get five or six quotes very quickly,” he said. “Today we go out to five or six and get maybe two. It’s still there; people are finding debt, but it’s more costly than it was just a few months ago.”
Construction costs, especially the cost of construction labor, have risen, particularly in certain high-demand markets.
“It really matters where we’re building,” Keeling said. “If you’re building in Nashville, Austin or Dallas, construction costs are off the charts, as well as land costs. We have three hotels we’re pursuing now in Dallas, and every time we go out for a bid it’s up another $2 million from what it was the last time we got an estimate, mostly because of availability of sub-contractors.”
By contrast, Keeling said Houston is a market where construction labor costs are more reasonable.
The effects of consolidation
Several panelists said they don’t believe the industry will see continued consolidation but there might be continued proliferation of new hotel brands.
“A lot of things need to align in order for additional (mergers and acquisitions) in this industry,” Meliker said. “It’s not just about the strategy making sense; it’s also about the corporate structure and the financial structure making sense. Right now, I’d be shocked if we saw any large-scale M&A between the big players in the space in the next two or three years, just because of those dynamics.”
Meliker said while Hyatt Hotels Corporation seems a likely partner for a merger, the company’s corporate structure is an impediment to such a deal.
“Hyatt makes a ton of sense for M&A but it will never, ever happen,” he said. “Those of you who were close to the Starwood (Hotels & Resorts Worldwide) deal know Hyatt actually was the high bidder, but Marriott (International) won because Hyatt has non-voting shares. It’s a private company in public-company clothing and because of that it creates huge complications in terms of trying to do any M&A for scale.”
And while the executives agreed Marriott probably won’t relinquish any of the 30 brands it now has since its acquisition of Starwood, they also believe brand proliferation is a possibility.
“I had an opportunity to be on the ground floor of six different brand launches in the last 35 years, and more brands are coming to your neighborhood soon,” said James Anhut, former InterContinental Hotels Group executive and now SVP of franchise development at DineEquity. “You only need to look at consumer package goods as the example. You go from the world of the operator to the world of the developer to now the world of the guest, or the consumer. The consumer demand will drive brands.”