MEMPHIS, Tennessee — On this day two years ago when the first massive wave of COVID-19-related shutdowns hit the United States, many hoteliers thought the impacts would be temporary. Now, many of the challenges facing the industry pertain to shifting business models and expectations that are expected to be permanent.
“We’ve been living with this for two years. It’s more than just an event that we had to deal with,” said Hostmark Hospitality Group President and CEO Jerry Cataldo during a recent Hotel News Now roundtable discussion. “It’s been a change of life. People have changed how they think about life and how they want to live their lives.”
Hotel News Now, in partnership with Pinkowski & Company, convened a group of U.S. hotel industry executives to talk about the state of the industry two years into COVID-19 and the opportunities and lingering challenges wrought by such widespread disruption.
“There is permanent change,” Cataldo said. “Some of it is good. Some of it is scary. And there’s a lot of the industry that just doesn’t know what’s going to happen for them — what business travel is going to look like, what their employees will want. It’s going to evolve and we don’t see all the answers clearly.”
Hostmark is a third-party hotel management company based in Chicago.
Roundtable participants, who ranged from hotel investors and owners to third-party managers, designers and architects, agreed that the changes happening across all levels and segments of the industry are a mixed bag of positives and negatives, depending on the asset, the location and any given stakeholder’s goals.
Top of the positives list continues to be leisure travel, whether it’s pure leisure or the increasingly popular bleisure mix.
Hoteliers with properties in leisure markets have had success driving average daily rate over the past two years, and keeping those rates high is definitely a priority, said Larry Wright Jr., president and CEO at hotel investor Wright Investments, based in Memphis.
“We have huge discussions about how much we can depend on these leisure, transient travelers,” he said. “I don’t think any of us are going to give up rate going forward because insurance and labor costs are higher, so we’re going to be fighting to the death for these ADR changes. We want to make these permanent.”
Roger Hill, chairman and CEO of Chicago-based architecture and design firm The Gettys Group, said demand for leisure and bleisure travel will continue to be high, and that’s influencing everything from building trends to underwriting.
“It already existed before, but it’s even more perfect now because it fills a nice void in the landscape and gives you revenue-management opportunities, particularly if you design some rooms the way we do it in the timeshare industry with lock-offs, where rooms can be sold as a multi-bedroom unit and also sold separately,” he said. “It’s also positive from an underwriting perspective, because we saw the extended-stay segment handle this crisis in a good position. Lenders may look at properties and see advantages if a certain percentage of room inventory can flex in a different way.”
Ron Lustig, principal at Nashville-based ESA, an architecture and design firm, agreed that leisure travel trends are influencing new hotel construction and conversions.
He said his company sees the trend manifesting clearly in its headquarters city of Nashville, Tennessee, where bachelorette parties dominate leisure business.
The increased demand for expanded gathering spaces, different guestroom types and other amenities plays a big role in how his company approaches projects.
“When pools reach capacity on weekends and the fire marshal has to come in, that’s when we need to look at ways of expanding the pool deck, maybe adding extra stairwells,” he said. “In Nashville, things come into the discussion like adding more double-double room types, maybe adding another bathroom here or there.”
Micajah Sturdivant, CEO of Jackson, Mississippi-based third-party management company MMI Hospitality Group, opened The Memphian, a Tribute Portfolio hotel, in Memphis in May 2021. The new-build hotel has 106 guestrooms, a two-meal restaurant and a rooftop bar.
Sturdivant said what he has learned about bleisure demand is that hotel operators can find creative, low-cost options to meet and exceed guest desires.
“We built this hotel to not have traditional ballroom space or lunch service and we’re doing everything the brand expects and more,” he said. “We’re finding we’re in that sweet spot for belisure customers — having the things they need. But it’s interesting that the primary guest comments we get are that we don’t have valet or roomservice or bellmen.”
Sturdivant looked into incorporating technology solutions to solve the valet question, and customer-service solutions for the room-service question.
“Now, if a guest checks in after the restaurant is closed, we can tell them instead which restaurants nearby are open,” he said. “We have to be creative as operators to work with what’s around us and bring the neighborhood in to solve some of the issues.”
Sunny Desai, CEO at Ridgeland, Mississippi-based investor Desai Companies, said there’s some value gap, as guests realize they are paying high rates and in some cases services or amenities have changed, such as a reduction in housekeeping. But he sees pushback as “a short-term thing.”
“Operators won’t start discounting rate. Everything is costing more and guests will realize rates are higher,” he said. “Over time, guests adjust to the new pricing. But nobody is going to start cutting rate.”
While it’s still unclear how and when business transient travel will return in the U.S., roundtable speakers had their own predictions, many around the long-term impact technology may or may not have on the segment.
Tracy Prigmore, managing partner of real estate investment firm TLTsolutions and founder of the She Has A Deal investment platform for women, said she predicts the widespread adoption of virtual meeting platforms will lead to more quality in-person business travel.
“My hypothesis is that as offices open back up, the hardcore business traveler is going to have a better reach into prospecting because people are more comfortable with technology. Executives can screen more prospective clients over Zoom, but only get on the road for the real deal,” she said. “They’ll still travel just as much, but have more quality and productive visits.”
She also pointed to the yet-untapped market for in-person meetings among colleagues who have gone to fully remote work.
Peggy Berg, past president of The Highland Group and current chairwoman of Castell Project, agreed that the lure of business travel is still out there.
“We’re still in a situation where many companies haven’t permitted their people to travel again,” she said. “But as soon as they get the expense account back, they’re going to be out there, because people love to travel, especially if somebody else pays for it.”
Chuck Pinkowski, owner of consultancy Pinkowski & Company, pointed out that in past economic cycles when mega events halted business travel, sales still happened, and companies in many cases realized that they didn’t need to send people out on the road.
But in today’s climate, the return to pre-pandemic levels of business travel has a domino effect, and once some major companies get back into it, others must and will follow, speakers said.
“Business transient travel will come back, but much more cautiously in many cases because I do think companies have seen the savings,” said Craig Strickler, managing director of third-party hotel management company Valor Hospitality Partners, based in Atlanta. “Financially, companies saved money because people didn’t travel, and they like that extra money.”
With that still-hazy outlook for business transient travel, and other unknowns like the possibility of future COVID variants, underwriting deals is also changing.
“You have to be better at underwriting than you ever have been,” Desai said. “You need an institutional-quality underwriting team to be able to execute a deal right now.”
Since different markets present such variety in recovery — hotels in drive-to resort markets are commanding high prices that may not be sustainable, downtown hotels are are still running low occupancies, and middle players are showing some return to 2019 performance levels — there are a lot of factors in underwriting the risk of a deal.
Strickler said “there are a lot of silly-money people out there who believe a fundamental change in guest behavior will not happen and they’re willing to ride it out for the next few years and enjoy the cash flow, so they’ll pay the big price” for certain assets now. “But we all have no idea what guest travel behaviors will be next year. That’s underwriting. It’s black-and-white numbers but it’s not a science,” he said.
Prigmore said she’s evaluating many deals and has found that “you can’t think of [underwriting] the same way you did before” because of the wide variances location to location.
“Business travel is the gap for many of these hotels, and if it fills in, great if you can maintain the rate, but what about markets where the rate is down and occupancy is back up and you think, ‘Is the rate gone forever?” she asked. “It’s a game of guessing what scenarios will be and what we factor in.”
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