While development opportunities are plentiful, recession concerns persist

LOS ANGELES — Hotel chief development officers are optimistic about the growth of their particular brands, but the “will we or won’t we” question about a potential recession persists.

“We feel that the economy sectors are at the tip of the spear. We did recover very quickly from COVID, and we’re seeing some of the downturn,” said Tina Burnett, chief development officer of Carrolton, Texas-based G6 Hospitality, which runs the Motel 6 and Studio 6 brands. “While we’re still seeing great growth, occupancy has fallen flat, if it hasn’t declined a little bit. But from a growth perspective, ownership groups know that the economy tends to rebound… We’ve been teetering a lot on, ‘Are we in recession? Are we not?’ For longer than usual. Can we just either go off the cliff or not?”

That teetering back and forth is causing some uncertainty and “pauses” in the hospitality development market.

“We just need to know. The economy tends to rebound much quicker,” Burnett continued. “Our growth story has been a feast in 2023. And we anticipate 2024 to be the same. And that’s because owners know that in economy lodging, people start to downgrade as recessions hit. And so either it needs to happen or not. But it’s the teetering that’s causing a pause right now. This has been going on for so long.”

The panel “Development — CDOs Outlook” featured executives from some of the biggest hotel companies in the world: Burnett; Greg Doman, CFO of Chicago-based Virgin Hotels; Chip Ohlsson, EVP and CDO of Wyndham Hotels & Resorts; Noah Silverman, global development officer, U.S. & Canada of Marriott International; and Julienne Smith, CDO, Americas of IHG Hotels & Resorts. It was moderated by Rachel Humphrey, founder of Women in Hospitality Leadership Alliance and principal at DEI Advisors.

The panel was held on the second day of the Americas Lodging Investment Summit (ALIS) at the JW Marriott at L.A. Live in Los Angeles.

Key money concerns

Ohlsson was asked about the current constrained financial market and how that affects owners looking for key money. He said it depends on the situation and if key money is the best option for the owner. 

“Owners have options now. They have more options than they’ve ever had before. So, you better have the best value proposition you can put in front of an ownership group,” he said. “If that means key money, if that means discounts, if that means a better loyalty program, if that means being able to drive more heads in beds, and looking at ways to capture that guest for the owner, you better do it.”

Ohlsson said Wyndham hasn’t seen a big jump in key money in the current capital environment, adding it sometimes makes sense and that the company used it when launching its new extended-stay brand, Echo Suites.

I think the shift and probably what’s most frustrating for those of us on this panel is we often get calls from people we haven’t established a relationship with, who say, ‘How much money can you give me for this project?’

Julienne Smith

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“Today, it looks a little differently than it did 10 years ago because the needs are different for those owners,” he said. “We’re willing to do key money if it makes sense for the right project. For their billboard projects or for a brand we want to grow and help launch. We did that with Echo [Suites]. It was important for the Echo brand, initially, to do that. But since the launch of Echo, we pulled way back on that. So, it depends on the ownership group and what they’re looking for.”

Smith said you need to know the owner’s situation to determine the right financial incentives for the deal. 

“I think the shift and probably what’s most frustrating for those of us on this panel is we often get calls from people we haven’t established a relationship with, who say, ‘How much money can you give me for this project?’” she said. 

“And for us, it’s ‘Well, who are you? Where’s your project? What is the right brand fit?’ Let’s build a relationship here first and understand your needs. And do they fit our overall needs and strategic edge strategy in the market? So, it’s become almost like a commoditization of something that shouldn’t be commoditized. We’re in the hospitality business and delivering an experience and returns to our owners. It’s the value of the company that should stand first and then plug in the rest. So that’s the shift. Hopefully, we will go back to a place that is relationship driven. It’s market and strategy driven, versus selling a term sheet.”

Ohlsson agreed with Smith’s points. 

“If somebody gives you a free meal, but it’s inedible, and you can’t eat it, who cares if it was free?” he said. “Who cares if we’re giving key money out if it’s not what you need and what your project requires? And owners now understand that key money isn’t free. There are handcuffs that come with that key money. And it may not be right for your project to do so. Let’s look at your project. Let’s see what it’s about. Let’s understand your capital stack and whether it makes sense for you to have key money, or if there is a better way to go out to market.”

Doman said his company’s focus is much tighter because Virgin only has two brands.  

“We’re obviously in a bit of a newer stage. So, we’re still very focused on building out our urban platform, both here in the U.S. primarily and Europe,” he said. “London’s a huge focus. We opened up with Edinburgh last year and are focused on key markets. [In the U.S., you can] follow the demographics and migration patterns. Miami is a big focus for us… Anything in Texas. We’re very focused on building out our urban platform down there.”

Doman said conversion is a big focus. 

“Last year, about 20% of our activity was conversion-related. This year, it’s a third and more over in Europe than [in the U.S.], which is incredibly competitive because everyone’s focusing on it.” 

An evolution past business transient

When asked about his thoughts on the industry in the longer and nearer term, Silverman said the longer-term prospects offer an extraordinarily bright future. “We’ve just seen too many dynamics that’s been talked about extensively about consumer sentiment moving away from consumption of goods to experiences, and we are in an experiential industry.” 

But, he said, in the nearer term, it’s more segment-driven.  

“The reason I think that some of us have spent time expanding our offerings in the extended-stay segment is because that was a segment that over time has continued not just to prove out its resilience… But its appeal to an increasing segment of guests that are driving additional demand for extended-stay products in different tiers and segments.”

“I probably feel least good about the [business transient] segment and where it may be going… We have had enough time past the impact of the pandemic that it’s hard to feel great about a full recovery of business transient back to pre-Covid levels. And we’ve seen that full recovery in every other segment.”

Noah Silverman

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Silverman said the business transient segment is still where he sees a lot of uncertainty. “I probably feel least good about the BT segment and where it may be going… We have had enough time past the impact of the pandemic that it’s hard to feel great about a full recovery of business transient back to pre-COVID levels. And we’ve seen that full recovery in every other segment.” 

Silverman said that just means the industry has to keep evolving. “Where hotel patterns would have driven an investment decision around a hotel that has mostly focused on business transient in the past, it may be a more difficult proposition to underwrite now than it was before,” he said. “Those offerings have to evolve in ways that make it more appealing to the segments of consumers that have continued to grow and grow more rapidly and fully recover." 

That could mean appealing to leisure consumers that might have been overlooked in the past. “So, making those brands offerings more appealing, for example, to a leisure consumer in a way that lots of times in the past, we weren’t content to overlook that customer, but it just wasn’t as important a segment for driving the success of our hotels as it as it is today," Silverman continued. "So, we need to continue to evolve our offerings in ways that yield success to the investor, and those that have focused on BT in the past may need a different approach.”