Recession Risk Compels Hotel Investors To Slow Down But Not Stop

DALLAS — While there is no shortage of headwinds for hotel investors and developers, executives speaking at the Americas Lodging Investment Summit Summer Update said those issues are more likely to slow the industry and the broader economy than stop them.

Bharat Patel, partner at Gulf Coast Hospitality, said from a developer’s perspective, projects “still move forward,” despite inflation and supply chain issues.

“Planning a project is months in the making, or perhaps if you’re in California, years in the making. So you just scuttle forward,” he said during the Real Estate Outlook session.

Hand-wringing about whether the economy is headed towards a recession — or is perhaps already in one — will likely lead hoteliers to be more careful, but not compel them to sit on the sidelines, Patel said.

“What you do father back is you take better care of the project, put more eyes on it, and you kind of father back what your future was,” he said, suggesting a more limited time horizon when looking at investments — for example, planning for the next three to four years instead of the next 10 years.

Miraj Patel, president of Wayside Investment Group, agreed that investors need to look a bit more closely at projects.

“It’s going to be important that we have a proper business plan, that we’ve looked at every deal that’s come about and is there going to be a good exit at the end,” he said. “And if we were to not have an exit due to change, are we going to be able to operate and still have cash flow?”

Tiffany Cooper, senior vice president of development in the Americas for Kimpton Hotels & Resorts, said the optimistic point of view is whatever crises may await the hotel industry, odds are it will be orders of magnitude smaller than what the industry just survived.

“We’re just thankful this isn’t July of 2020,” she said. “We just crawled out of probably one of the darkest holes in recent history for operating companies and brands. I think one of the gifts of COVID — and there have been some gifts — has been being able to rightsize our organization operationally.”

She said due to the pandemic-era hardships on travel and hospitality, Kimpton is “actually better prepared now, and we hope it’s not as deep and dark as it was two years ago.”

Cooper did note, though, that what the industry has saved in terms of operational costs over the past two years can’t last forever, and it’s already showing up in guest satisfaction scores.

“Skimflation is a real thing with hotels,” she said. “We’re charging much better rates, which is great, but we’re giving them much less service, just on a personal connection basis.”

Miraj Patel said one reason ownership groups haven’t gone back to a more full-fledged service model is general fear.

“There’s a fear about what if something like this happens again,” he said.

Miraj Patel said the hotel industry seems to be undergoing a generational exodus, particularly within the membership of the Asian American Hotel Owners Association, of which both he and Bharat Patel are board members.

“A lot of folks are starting to see that [net operating incomes] aren’t what they were five years ago or 10 years ago, so they don’t see opportunity in the lodging industry,” he said. “We’ve seen that second and third generation start to exit.”

I pointed specifically to self-storage as an asset class that holds some appeal.

Bharat Patel said in large part they’re making this switch due to the simplicity of operations, compared to labor-intensive and relatively risky hotel investments.

“The cap rate for storage space might be lower, but guess what? The labor is literally one person,” he said.

Assisted living is a hot real estate class for owners moving out of hotels, he said, noting it is like “apartments lite.”

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