Investment, design intersect: 21 takeaways to consider
 
Investment, design intersect: 21 takeaways to consider
07 DECEMBER 2018 9:23 AM

Five investors took on a flurry of questions during the recent BDNY event in New York, touching on topics ranging from hotel design and renovation trends to the economic cycle.

NEW YORK—Investors representing geographically diverse hotels worth billions of dollars provided commentary about key issues including hotel design, the duration of the current economic cycle, and renovation trends during the recent BDNY Conference at the Jacob K. Javits Center.

Following are key takeaways from the hourlong session that featured five speakers:

  • Thomas Prins, principal, TQP Investments LLC;
  • Sam Suleman, EVP, Equinox Hospitality;
  • Evens Charles, CEO and president, Frontier Development and Hospitality Group;
  • Adi Bhoopathy, principal and EVP, investment management, Noble Investment Group; and
  • David McCaslin, EVP, Hersha Hospitality Management.

Why design is important to investors
Suleman used the words “critical” and “authentic" to describe how he views design. Charles agreed.

“Definitely the design aspect is critical because at the end of the day, the consumer places value in innovation at the property,” Charles said. “If you look at the different sectors within our space—midscale, upper-midscale, upscale—everybody has really been enhancing their design aspect, and it’s creating more competition in creating more of an expectation of the consumer.”

Bhoopathy said “crucial” is a key word to describe good design.

“There’s no shortage of consensus that design element today is crucial and essential and clearly funded,” he said. “Being a branded owner, finding selective design and smart design is important because there’s only so much you could (do to) customize it in the cooler brands. We’ve started exploring and putting more on the collection brands like the Autographs … where you can take the customization to a much more cornerstone level.”

McCaslin said the investor-design relationship is a double-edged sword.

“I view it as value-creating because you really can’t actually get more people to buy more beverage or spend more money. … (It’s) frustrating because everyone and a brother believes they have an opinion on it—usually it’s based on their personal experience and not really about what the investment criteria is,” he said. “So the design process sometimes is very capped.”

Dealing with rising construction costs
Bhoopathy said construction costs “have been going up for a considerable period of time.”

“It’s been going up on a clip anywhere from 5% to 10% on a very consistent basis,” he said. “The element of not having enough people to get the projects done has put substantial pressure on any ground-up deals or any major renovations. So one of the ways the costs are increasing is just pure time.”

That has added three or four months to the typical construction cycle of 18 months to 20 months, Bhoopathy said.

The labor shortage that has hit most industries in the U.S. is having a negative impact on hotel construction, Charles said.

“It’s difficult to secure subs … and that’s one of the reasons why prices are just blowing up,” he said. “I’m experiencing that in real time.”

Prins said hiring a really good project manager is essential as costs continue to escalate—but even the really good ones can’t escape his wrath at times.

“I beat him up all the time—to any project managers out there, I apologize for my tone 90% of the time,” Prins said. “But I am very sensitive to cost in every way. There’s nothing we can do about what’s going on in the world to increase cost of subs and materials, and it’s a fact of life.”

The duration of the cycle
Panelists agreed it’s hard to predict when a cycle will begin or end, but paying close attention to key indicators is critical.

“All the previous cycles burst when they had two things: an external event that triggered something and supply was dramatically higher than demand in growing,” McCaslin said. “Right now, supply is growing, but it’s not really substantially higher than demand.

“Nobody knows if there’s going to be another external event, like a war or a crash or something of that nature, but what is different about this cycle is all the other ones had periods of great deceleration and acceleration, and all the manufacturers play off of that. This one is sort of like a slow, steady growth, so there hasn’t been this massive acceleration to come down from.”

That means owners, operators, developers and others are able to plan a little more to weather any upcoming storm, McCaslin added.

“I would watch as supply starts getting up and starts growing faster than demand,” he said. “Then I think you are going to see that’s sort of the end because that’s when people are doing stuff just to do it.”

Suleman said because each downturn is different, knowing exactly what to expect this time around is difficult.

“The experience at the beginning of the downturn won’t be like the last one. … We’ll just have a general slowing,” he said. “But still a market-to-market situation because there’s markets that have just been way overbuilt, especially in the select-service areas.”

The Equinox executive pointed out markets such as New York, Chicago, Portland and Seattle as ones to be leery of in terms of supply growth. On the other hand, San Francisco is a market that has experienced constrained supply growth during this cycle to the point of it being undersupplied.

Noble’s Bhoopathy said it’s essential that hotel owners, operators and developers are ready for a downturn—whenever it happens.

“We’ve been preparing for a recession for a while,” he said, adding that hotel buyers generally haven’t gone nuts with bidding on assets that are for sale, and that has helped stave off a downturn.

Another key to the current cycle remaining relatively strong is the approach taken by lenders, according to Prins.

“The good news is leveraging is a lot different now,” he said. “There was a time when banks really leveraged up their acquisitions. It put the lenders in the position where they had to foreclose (when the economy went bad), and now because of little leveraging, you’re not going to have that lender pressure.

“There were a number of cycles where banks just did not learn, and they kept leveraging these things up, and then boom. They learned this time, finally.”

Massive renovations vs. ongoing refreshes
Hoteliers are taking a different approach to renovations because the industry is operating at historically high occupancy rates (hovering at approximately 67% nationwide, according to Hotel News Now parent company STR), the speakers said.

  • “There are less (massive renovations) today, and there is more sensitivity to maintaining your share,” McCaslin said. “You’re going to continue to see renovations, but they’re going to be more ongoing. … You may not see as many total gut-job renovations because most investors aren’t letting new properties really drop.”
  • “You’re always going to freshen your hotel—case goods, OS&E—especially when you see new construction, you need to keep your market share and do whatever is necessary,” Prins said, adding that the major renovations will come when things turn south and occupancy dips. “(Waiting for a downturn to renovate) allows you to not have to shut the hotel down during renovation. It allows us to look at where we want to be when the market returns.”

What’s considered a ‘safe’ investment today?
McCaslin said with investment, the hard brands are generally considered “the safer bets … as opposed to a soft brand, because people know what they’re getting.”

“People aren’t expecting the thing to skyrocket, but they are expecting that if there is a downturn, it will hold its value,” he said.

While it’s not a very exciting story, it’s one that is gaining momentum, McCaslin said. He added now he’s hearing “as many conversations about preservation and capital” as he does investors talking about “making a killing.”

“There’s still a market for people who want to do things that are dramatically more innovative—it’s not like everybody has shifted out of that, but there’s clearly a grouping of institutional money that just want sort of safe—no surprises,” he said.

Advice, looking ahead

  • Suleman: “There’s tremendous pressure—at least on the branding side—to move to consolidation and really end up with three to five big, big brands that are containing the whole industry. And there’s tremendous pressure on the ownership side and on the branding side because we know there are a lot of hotels these last couple of years that have had increases in the top numbers, in the top revenue. But on the NOI side for a lot of owners, it’s been bouncing around the bottom.”
  • Prins: “It’s not if, it’s when (there will be a downturn). Just be ready. There’s going to be a lot of opportunities in the design world to take advantage of it.”
  • Charles: “Continue to focus on how to deliver designs that are cost effective, that (give) appearance of being a tier above—a 4-star appearance at a 3-star price point.”
  • Bhoopathy: “Bad design costs just as much as good design. It’s a lot more of a collaborative process today—things are a lot more up-front in trying to have smart design. It’s just not an aesthetically appealing one, but you could design it and make it very functional as well. That’s one way to make sure the investor gets the most for their investment on the spaces.”
  • McCaslin: “Focus on your clients and the communication and understanding what they’re trying to accomplish. In a consolidating industry, if you’re an owner and your choice is narrow, you’re always going to go back, not necessarily to the flashiest presentation, but to the groups that you felt like you could count on and help you make money.”

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