PIPs on a pendulumBy Jeffrey Weinstein | August 15, 2023Share Brands have reinstated PIP requirements, making improved communication between the two sides key to negotiating flexibility in the process and avoiding potential conflicts. After COVID-related forgiveness, brands are expecting owners to reinvest more in their properties. But it just isn’t that simple, owners say. Their reserves are just starting to replenish, borrowing power is reduced, costs for renovations continue to jump, and some owners still have to prioritize things like leaky roofs and HVAC investments. Bottom line, completing PIPs (property improvement plans) is taking longer and both sides need to communicate and prioritize what can and cannot be done in the near term. The other option for cash-strapped owners – prep for a sale.“Brands are getting hammered on guest satisfaction. Guests are paying more even if occupancies are not all the way back – and they’re not happy,” observes Larry Trabulsi, managing director and executive vice president with asset manager CHMWarnick, Beverly, Massachusetts. “Guests are seeing staffing shortages, deteriorating product, you name it. This is one of the areas where the brands are starting to push back saying, ‘we were nice for a bit, but it’s time for the pendulum to swing back a little bit the other way.’”Chris Bagnato, senior vice president, Americas, Hotel Lifecycle & Growth for IHG Hotels & Resorts, said after the Omicron variant subsided in mid-2022, they slowly started seeing the pace of renovations pick up and have now reached a point where the number of renovations across IHG brands are back to 2019 levels, and then some.“The other challenge was that hotels were trying to recover and taking all this business,” Bagnato added. “Actually, it was really challenging to get going with the renovations. So, we continued on an individual basis to work with owners.”Guests are seeing staffing shortages, deteriorating product, you name it. This is one of the areas where the brands are starting to push back saying, ‘we were nice for a bit, but it’s time for the pendulum to swing back a little bit the other way.’Larry TrabulsiShare this quoteYes, Bagnato said, there were owners who were struggling with replenishing capital reserves or can’t get a loan and needed more time. “So, certainly, we would work with owners on those individual situations,” he said.But at the end of the day, Bagnato also said it is time to get on with renovations for the good of the brands and most owners, despite a variety of challenges, are finding a way to get it done.“When we scope out a PIP, we look to make sure that it’s market appropriate and fit the brand,” he added. “We work directly with the owners. So, it’s not necessarily always one size fits all. We want to make sure that they’re meeting all the expectations that our guests have, but we’re not going to recommend or do things that just aren’t going to pencil for an owner.”Lloyd Crabtree, chief asset management officer with investment management firm Satori Collective, refers to the current state of affairs for some PIPs similar to jamming an apple into a blueberry-sized hole. So, he said, negotiating and managing a PIP requires more finesse.Negotiations versus flat out PIP demands or refusals is the scenario most everyone is seeing today as both sides seem to want and need each other.Crabtree said brands are getting out in front of planning, making more announcements and talking about refurbishments further in advance. But a problem he sees is a brand’s ability to follow up in a timely manner with owners. There is so much PIP volume trying to get through the channels and brands remain short-staffed with people who handle this type of work. “But there are not a lot of macro changes to PIPs due to COVID,” he added. “It’s kind of like, ‘here’s your PIP document. Look at it, put a plan together, send it in for review, hire your project managers and hit all these checkpoints.”Chris Bagnato, IHG Hotels & ResortsMost importantly, the brands want to see progress from owners. Managing a $60 million PIP in two or three phases instead of one, for example, is not beyond reason. Trabulsi said he is not seeing brands threatening to pull flags, especially if guest satisfaction scores are still good. Creating a punch list for upgrades and touch-ups, doing a deep cleaning to improve QA scores can also help buy time to manage brand expectations.Echoing that sentiment is Christopher Doyle, senior vice president, asset management, for Hersha Hospitality Trust, Philadelphia. He said Hersha has most of its experience with Marriott International and believes guest satisfaction scores can be a trigger for flexibility on PIPs. “If you’re doing well, and there really aren’t major guest-facing issues with the product, they have been willing to give some relief on lifecycle renovations,” he said. “A typical 7-14 cycle might stretch to eight or eight and a half years, assuming the product is in pretty good shape and GSS scores are good.”Trabulsi added it’s not uncommon for his team to get brand team members on the phone weekly, biweekly, monthly just so they know that progress is being made. “But when it comes down to the big dollar decisions, we’re not on the phone – that’s an owner’s decision. And at the end of the day, it’s about funds available and what makes sense, what’s the right dollar amount for each individual asset. In a lot of cases, that becomes a prioritization exercise.”Flexibility factorDoyle referenced a Marriott Autograph Collection property in Miami where the scope of work included the lobby and guest rooms. Hersha’s position was to put more capital into the guest room product and then phase in the other work later, and Marriott was accepting of that. “They understand that we don’t have unlimited funds and didn’t want to take a hard line,” he said.It’s not necessarily always one size fits all. We want to make sure that they’re meeting all the expectations that our guests have, but we’re not going to recommend or do things that just aren’t going to pencil for an owner.Chris BagnatoShare this quoteDoyle also pointed to having a good relationship, particularly at Marriott, with the franchise ownership group that can approve the scope of work. “Based on relationships, their understanding of the market, the concept, and then who the true competitors are, they’re willing to be a little more flexible on scope,” he said.That said, Doyle added that it’s challenging to consider expensive repositioning projects in this environment because there remains a mentality of wanting to conserve capital in case business gets rocky again.He also wishes brands would be more flexible about all-encompassing lifecycle renovations. “As costs go up, there’s a certain point where an owner is going to say, ‘that piece of furniture might still be in good shape, and we can work that into a new design.’ And the brands will say, ‘well, that’s not a complete lifecycle renovation.’ So, it’s managing where I think owners want to be a little more selective, almost like an independent boutique type of approach... Brands need to understand that kind of approach because we’ve priced out a couple of luxury rooms recently at well over $100,000 a key. You just can’t justify that kind of investment from a return perspective.”The short answer, Doyle said, is there’s still understanding of what’s going on in the broader economy. “We’re not back to pre-pandemic enforcement, but they are not going to let you push out a softgoods lifecycle renovation three, four years past whatever a typical completion date would be.”Where Crabtree is seeing some flexibility and a bit less emphasis today is mostly around exterior work and spending more money on things that generate some kind of improvement to the cash flow.Christopher Doyle, Hersha Hospitality, Trust“Our recommendation is more thinking about the 'bleisure' customer and space to work – whether that be the public areas and making them a little softer to absorb sound, more private cubbyhole areas that are more flexible and with natural light,” Crabtree said.Execution pain pointsReaching equitable agreements on PIPs is one thing; executing on the PIP is something altogether different.Trabulsi said he is already being told that owners trying to swing a hammer by 4Q24 are behind and could lag till 1Q25. Add rising costs and execution on renovations is simply tricky.Everything has come in more expensive than what Hersha has been estimating – even though they have increased cost expectations, according to Doyle. He added that contractors once eager for the work are today taking the attitude that hoteliers need them more. “You’ll have subcontractors who just walk off the job because they’re frustrated, and they know they can go out and get other work elsewhere.”Doyle did say supply chain issues have improved dramatically over the last 12 to 18 months, but in the next breath added that softside delays are not helping. He cited designers who will drag their feet on changes, which can upset the schedule and lead to increased warehousing costs.“Probably the biggest frustration I’ve had is getting all the parties to move and prioritize, and to hold everyone accountable,” he said. “For completions, there’s a different mindset now.”The more dialogue you have, the more understanding they’re going to have for you and your position… That’s a critical piece because you’re going to get more flexibility.Christopher DoyleShare this quoteDoyle’s best piece of advice: focus on leveraging relationships with the brands and getting in front of it. “Have the conversations and really educate decision makers on the brand side about why you’re making a decision on a PIP or renovation,” he said. “The more dialogue you have, the more understanding they’re going to have for you and your position… That’s a critical piece because you’re going to get more flexibility.”Absent the compromise of a financial solution, the likely outcome in the near term is more churning of assets.The key, said Doyle, is to find a buyer who’s going to take on that renovation plan. And that’s the tough part.If it’s too tough for the potential buyer, Doyle said it might be a better strategy to first do the renovation and then sell versus a new owner coming in with no brand relationship and likely facing a PIP that is 30% to 40% higher. “Maybe that’s a conversation you have on an asset with a potential buyer on the front end,” he said.“We’ve seen a tremendous increase in change of ownerships,” Bagnato added. “But these change of ownership licenses that we do are done in a way to make sure that whatever that renovation cycle was that it stays on track. And we’re relatively successful at retaining the hotels through a change of ownership and getting it with somebody else that that maybe has better ability to get the PIP done."