Lack of Capital, Higher Costs Constrain Hotel Supply Growth

LOS ANGELES — With strong demand for hotels and indications that labor costs might moderate, it’s a good time to be a hotel operator. For developers, however, the environment remains particularly difficult, according to a panel of executives speaking at the 2023 Americas Lodging Investment Summit.

During the “Boardroom Outlook: Assets — Economic Factors Impacting Hotels” session, panelists said supply growth will be constrained in the near term mostly due to the high cost and limited availability of capital.

Greg Juceam, president and CEO of Extended Stay America, said that’s been enough to counteract decreasing material costs.

“We’ve started to see a deceleration in the costs and more availability of (material) supply, but it’s whack-a-mole because now we have to deal with interest rates where they are,” he said. “And that’s what drives development.”

Hubert Viriot, CEO of Yotel, said borrowing is primarily a concern in North America, with more capital available in Asia and Europe.

“In Europe, the cost of funding remains absolutely achievable in terms of development,” he said. “You can justify new growth, new supply.”

Martin Newburger, partner at KSL Capital Partners, said the lack of capital available for hotel projects presents an opportunity.

“I think there’s clearly a need, and someone will step in and fill the need,” he said. “You’re not seeing a lot of transactions as a result of the high cost of financing.”

He said his company, like a handful of private equity investors in the industry, are offering a lending platform to fill that gap.

Rob Hays, CEO and president of Ashford Hospitality Trust, said he expects more deals to get done “in the next 12 to 24 months” as investors get more comfortable with the costs of debt and more sellers are motivated to move hotels.

“I don’t think you’re seeing necessarily a lot of distress,” he said. “I think you’re seeing very highly incentivized owners that need to sell because you’re coming up for an extension test on your loan, and that’s going to be a sizable pay down potentially. You’re gonna need to use floating rate debt. … And you’ve got these primary markets that have structural issues and aren’t recovering as you wish they were.”

Panelists agreed that many markets typically viewed as favorable for hotel investment — with San Francisco primary among them — are no longer as desirable as markets in the southeastern U.S.

“Over the last five to 10 years, we’ve heard … that the good markets are these ‘smile’ markets from Southern California through Texas to the South and Southeast,” Hays said. “Now we’ve got a new set of markets — the frown markets. It’s the northern part from San Francisco over to Portland over to Minneapolis to Chicago down to [Philadelphia] and New Jersey.”

Panelists pointed to several major urban hotel markets as still lagging in the return to pre-pandemic demand levels, with some signs of life now in New York and Washington, D.C.

Viriot said demand has returned significantly where Yotel hotels operate, primarily in the heart of major urban markets.

“We’ve seen very strong recovery in every single one of our markets,” he said. “Some took a little bit longer than usual. Maybe those markets which were supported or driven by very specific reasons — being a MICE market or international customers.”

Labor costs might be easing — or at least the growth of those costs is slowing — but the executives said it still makes sense to invest in technology to mitigate labor shortages.

Hays said wages are set to increase closer to 3% or 4% annually, compared to more than 30%.

He said his company is looking closely at what many other service-based industries are doing on the labor front.

“Mostly around robotics … Our companies are watching a lot of what McDonald’s is doing and seeing what extent of success they are having with tasks like burger flipping,” he said, noting a similar outlook could be applied to automating housekeeping.

Viriot said labor will continue to be a major challenge across the globe, and his company has always leveraged technology for an operating model that is more efficient and less dependent on labor. That doesn’t mean recruiting isn’t still a challenge.

“We had to recruit over 600 people over the last 18 months, so it’s been a massive issue,” he said.

Juceam said one of the biggest concerns is the elevated cost of contract labor, with one property being quoted $77 an hour for unarmed security on property.

“That’s three times what it was just a few years ago,” he said. “No thank you for that.”

Other important costs are creeping up or even spiking, including the cost of insurance and property taxes.

“The insurance and property tax markets are trench warfare,” Hays said, noting those costs are going up 30% to 50% across Ashford’s portfolio.

Newburger described increasing insurance costs as “awful.”

“The numbers just keep going up,” he said.

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