There’s no magic answer to when the next downturn will spring upon the industry. But what smart asset managers, owners and operators can do now is prepare.
Is the end nigh? Are we there yet? Has the cycle finally come to a conclusion?
The length of this current cycle, coupled with a weak November and, perhaps most importantly, the roller coaster ride that the stock market has been on, seems to have everyone wondering if this is it. The fact is, no one knows for sure, and my crystal ball is no better than yours. For owners and asset managers, though, it doesn’t matter. We know that it’s going to end eventually, and we better have a plan.
We can’t stop the inevitable, but we can make the inevitable a lot easier if we take steps now. As Tea Ros, managing director at Strategic Hotel Consulting, said at a recent ISHC conference, “It’s better to be preparing than repairing.”
While no one knows exactly when the next downturn will land, we’ve had a good, long run, and the odds are that it’s coming sooner rather than later. Some markets may already be in a downturn. Effective asset managers, owners and operators always are on the lookout for the next downturn, carefully analyzing different indicators such as booking pace, inquiries, booking velocity and recent performance.
Recessions and downturns have happened before, so we can look to the past to be better prepared for the future. Asset managers need to think broadly about the challenges they face and how those challenges morph in the face of an economic change. They need to make sure they are asking themselves and their operators all of the relevant questions and developing plans. At the same time, they need to be preparing their owners and investors. No one likes surprises.
Examples of ways to maximize preparation for a downturn include:
- As part of the budget discussion each year, make time to discuss, potential reactions to various downturn scenarios. What will get cut when?
- Work with operators on an ongoing basis to keep staffing levels under control in order to avoid layoffs in the event of a downturn.
- Grouping up—be more aggressive in group pricing to lock in future business.
- Maintain strong relationships with top corporate demand generators to keep them from abandoning you in your time of need.
- Ensure that guest satisfaction and online reviews remain strong going into the downturn to minimize the impact of potential rate wars.
- Have a long-term capital plan and evaluate the potential impact of a downturn with ownership, particularly from a cash planning perspective.
- In some cases, particularly at properties with very high fixed costs, outline and prioritize cost cutting measures tied to declines in revenue.
These preparations are not new or comprehensive, but they do serve as a reminder for the need to prepare. There are many in the industry now who were not around for the last downturn, and many more that have forgotten it. These preparations require key players to think through how they might react to certain unforeseen circumstances. Being prepared and having a plan helps to avoid surprises and allows owners and operators to make better decisions.
Anticipating the downturn early on and developing plans with the involvement of both owner and operator will significantly reduce the anxiety levels for all parties as we work to make the best decisions possible considering the situation. In these cases, it’s the job of the asset manager to do the worrying and make sure the above measures are taken. Be concerned with and identify the issues, but don’t panic.
As said, downturns are a natural part of the cycle. It goes back to ensuring all the bases are covered and the client is assured of the risk mitigation. Remember—preparing, not repairing.
Matthew R. Arrants, ISHC, CHAM is the Executive Vice President of Pinnacle Advisory Group and heads up their asset management practice. Pinnacle Advisory Group is a national hospitality advisory firm that specializes in asset management, market demand studies, and litigation support. Matt is the Chairman Emeritus of the International Society of Hospitality Consultants and serves on the board of directors of the Hospitality Asset Managers Association (HAMA). He holds the prestigious Certified Hotel Asset Manager (CHAM) designation. Matt graduated with a Masters of Professional Studies from the Cornell University School of Hotel Administration, and a Bachelor of Science degree from Hartwick College.
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