At ALIS, the challenging rate environment was top of mind

LOS ANGELES—The atmosphere at the Americas Lodging Investment Summit (ALIS) at the JW Marriott Los Angeles L.A. Live here was what one might expect from an industry that’s in the midst of an extended cycle where performance has been described as “good, but not great” for the past couple of years. One metric, however, was discussed at length throughout the conference: the lack of pricing power and inability to drive ADR, in terms of both the reasons why and what the industry can do about it.

Amanda Hite, president, STR, did not mince words. “The risk is there’s a good chance the rate growth is less than what we’re forecasting for 2020,” she said. (At the conference, Hite presented STR’s 2020 forecast: Supply is expected to increase 1.9%; demand is expected to increase 1.6%; occupancy is predicted to decrease 0.3%; ADR is expected to increase 0.3%; and RevPAR  is expected to be flat.)

“There’s just not enough out there to say that hoteliers are going to have anything different this year that will allow any more rate growth,” she said.

Cindy Estis Green, CEO and co-founder, Kalibri Labs, attributed that to three reasons: transparency in the market; hotels failing to invest in higher-value channels more than they have in the past; and hotels engaging in a race to the bottom by spending too much time reacting to what their competitors are doing.

Estis Green noted that uncertainty plays a part in this. “When there’s a lot of uncertainty, the knee-jerk reaction is to want to cut rates… It’s not healthy; you start cutting and everyone else starts cutting, and then we get into not a great dynamic in a lot of markets.”

Hite added that the consequence of new supply cannot be discounted either. “There’s a lot of new rooms coming in, especially when you look at the top markets. Supply is impacting the ability to grow rates,” she said. “And that’s not just hotel supply, but also short-term rental.”

Shared accommodations

“New beats old,” Mark Woodworth, senior managing director, CBRE Hotels Americas Research, commented. “New is not just a recently built traditional hotel, but it is the short-term rental type of unit that, in most cases, offers a superior value proposition.”

Hite noted that there’s a lot of flexible supply in lodging today that was not there several years ago. “We see it in the compression nights,” she said. “In the U.S., in 2019, we had 140 fewer compression nights where occupancy was 95% or higher than we had in 2018. When you don’t have those highly compressed nights where you are able to drive rate, that certainly has an impact on your overall business.”

“Alternative lodging accounts for more than 10% of total supply according to STR, and this year it’s forecast to go up to 12%,” said David Kong, president and CEO, Best Western Hotels & Resorts, echoing Hite’s points about compression nights. “If you think about citywide conventions, the compression rate has been affected because of this supply. It has had a negative impact on RevPAR, and if it impacts RevPAR, it impacts NOI and asset values. In many ways, alternative lodging is hurting the industry. What’s making it worse is you have these branded apartment owners/hotel owners like Sonder, and that’s even more worrisome. How do we get united to fight this?”

Jon E. Bortz, chairman & CEO, Pebblebrook Hotel Trust, noted that short-term rental companies have done a fantastic job shaping the message. “Short-term rental companies have done a great job marketing, saying you can live like a local—[which means] you can commute to where you need to be and the things you want to see as opposed to staying near them; but also this idea that it’s about sharing. It’s not. The business has really grown to be dominated by commercial operators who buy up multifamily housing and kick out the tenants and then rent it out on a short-term basis,” he said. “The zoning is different, safety is different. We have to continue to tell that story but we’re up against venture capital groups effectively, businesses that don’t need to make money initially and can spend a lot of money crafting this story.”

For his part, Tyler Morse, CEO, MCR, is not terribly worried about short-term rentals in the long run. “About 70% of the profits of our industry are from business travelers; the alternative accommodations are almost all wildly price sensitive, looking for a better deal—leisure travelers with low profit margins in the first place—so the 10% being sucked out of the industry is not the good business, it’s the lousy business,” he said.

He also noted that legislation and regulation is catching up, which will level the playing field. “The government is in the process of cracking down on this. If you have an entire building that’s a Sonder, that’s the same thing as a new hotel. Corporate apartments have existed forever; it’s just a newfangled way of describing them… The law is going to catch up,” he said. “Will it have an impact? Sure. But it’s a diminished impact with lousy guests.”

Kong noted that there are companies approving alternative accommodations for business travel, which could change the nature of the game.

Estis Green foresees more hybrid models such as Domio. “Right now, a lot of the short-term rentals are longer stays and lower rates, but that’s going to evolve. Eventually, it’s going to be part of the normal supply,” she said. “A lot of those models will become luxury, go after corporate accounts—it’s already happening. I think that, ultimately, all hotels will have to be mindful of it. It’s just a new kind of supply; it’s the evolution of the hotel industry.”

Hite also pointed out that this accommodation style has really come of age during the extended cycle. “This is supply we didn’t have in the last downturn, so that will be an interesting thing to see when we get to a downturn—if that supply stays in the market because I would imagine a lot of it would not,” she said.

Loyalty & OTAs

In addition to homesharing sites, third-party channels and the cost of loyalty were also discussed with regard to efforts to make rate count and increase profitability.

“I don’t know how to compete against the OTAs and alternative lodging without a loyalty program,” Kong said, noting that there are properties like the TWA Hotel that can do without, but “for the vast majority of us, our hotels are not like that. There’s lots of competition and we need that edge to compete.”

“Loyalty programs are an arms race,” Morse said. “The only reason to have a loyalty program is if it drives the purchase decision. The thing not often talked about in this business is how much you are deriving from the program as an owner of a hotel. For example, 80% of United Airlines travelers in any given year fly one United flight per year. They’re not loyal. They’re taking one trip a year. So you’re not impacting them by having this loyalty program, but it costs you a fortune to administer the loyalty program. You’ve really got to be honest with yourself.”

He continued, “We have a lot of Residence Inns; 65% of our guests are members of Marriott’s frequent guest program. In our Hampton and Hilton Garden Inns, it’s about 55%. That’s terrific. We’re happy to pay for the loyalty program because they bring the business. I used to work at Starwood and our central res contribution was about 22%. If you’re paying 13-14% of gross revenue to only get 22%, the loyalty program is not as effective. You’ve really got to just break down the math.”

Morse noted that why they’re there is also important. For instance, ALIS attendees who are Marriott Bonvoy members may have been staying at the JW Marriott, but the loyalty program wasn’t the reason for their stay. “So you just gave away something for free and didn’t get anything in return,” he said.

Acquisition costs are something to keep in mind. “How do we balance the acquisition costs with the business we want and how much we’re willing to pay for that business?” Kong asked, pointing to OTAs. “Some people describe it as snorting cocaine: You get addicted because then you give up on all your sales efforts, all your marketing efforts and you just do OTAs because it’s easy. But then if you’re so dependent on OTAs, you’re at their mercy. We have to look at OTAs properly. They are a channel for us. They bring new customers to us. It’s up to us to work hard to make that customer ours so next time the customer will book with us; a loyalty program is an effective way to do that.”

International visitors

Another major challenge for hoteliers? The decline in international visitors—and this was discussed amid the beginnings of the coronavirus crisis, before the COVID-19 coronavirus disease had even yet been named. (Economists at the conference did note that prior outbreaks, such as SARS, Zika and Ebola, did not affect the overall global economic outlook, but these events did have more short-term localized impacts. And, of course, even today there is no clarity on how long or how far the coronavirus impact will spread.)

Roger Dow, president & CEO, U.S. Travel Association, said, “We’re going through 128 months of straight month after month growth. If you look at the past decade, international tourism has been the bright spot. We got 724 million international visitors, up 50% over the previous decade, $9.4 trillion, but I’m concerned about something. We’re still growing about 2% in international, but we’re losing share again. In 2015, we had 13.7% of the share of the global long-haul travel market; last year, we had 11.2%. If we don’t collectively aggressively do something about it, we’re predicting 10.4% by 2023. What does that mean? If we lose that little gap of additional 2%, it’s basically $78 billion in revenue and 138,000 jobs. This is really critical.”

Driving this point home, Chip Rogers, president/CEO, American Hotel & Lodging Association, asked, “Does anyone know what the U.S. and Turkey have in common with respect to international travel? We’re the only two countries to see a decline in long-haul travel since 2015. When you put it in the context of only 0.2% down, it sounds like nothing, but the reality is where we should be in the market share is the most important thing.”

Bortz added, “In our urban hotels, international travel represents about 10% of our customers. If that’s flat, you don’t have growth in that segment, so we need to fill it with some other way. That often involves discounting. The international traveler coming to the U.S. on average is here for 17 days. When you think about its impact, it’s even more than the fact that it’s flat. It’s having a bigger impact because it’s typically the longest-staying customer.”

Bortz noted that there are reasons for this problem: the strong U.S. dollar, which is primarily related to the fact that the U.S. economy is stronger than most other economies; and the lack of a welcome message to international visitors to the U.S.

“It’s lacking under the guise of security, but the two are not mutually exclusive,” he said. “We have visa waiver programs that improve security, etc. Getting more countries into the visa waiver program would benefit international inbound travel.”

Peter Strebel, president, Omni Hotels & Resorts, added, “Our message of welcome is not that strong in the United States. We get a lot of press on our political environment, which right now is negative. I hope people from other countries don’t think that’s representative of the people of the United States. I love the fact that we have Brand USA out there telling the message that we’re warm, friendly and hospitable people. People come to America not only to see the sights but to experience our culture and our people. That’s something we as an industry need to do a better job of because all they see are the headlines that are not really reflective of who we are as a country.”

Echoing Hite’s point about new supply, Strebel added, “Gateway cities like New York and L.A., on top of the pullback of international travel, are also getting the largest number of new rooms. We’re increasing supply dramatically and we’ve got a challenge with demand, so it’s a double whammy.”

Plans for the future

How can hoteliers increase profitability in a challenging rate environment? “I’d be focused 90% of the day on how I can reduce production costs in every aspect of the business. The other 10% is on generating revenue,” Woodworth said. “In the vast majority of markets, there is a limit to how much we can push rate. If I was asset managing a hotel, that’s where I’d be focusing my energy to make sure we’re squeezing as much juice out of the apple as we can.”

Estis Green added, “You may not be able to raise your rate, you may not be able to cut many of your expenses, but you can manage your business mix, which will do two things: improve your cost factors because it will cost less to get the business, and potentially get you a higher rate if you have the right mix. It’s low-hanging fruit. Hotels haven’t paid much attention to it yet.”

“Profit growth or the ability to maintain profit margins in this sort of environment is going to be a real challenge in 2020 and a heated debate between operators and owners about the best way to do that,” Hite predicted. HB