ALIS boardroom: Assessing development, labor challenges

Topics ranging from supply to labor and capital markets status were top of mind with industry leaders who weighed in during one of the boardroom panels at ALIS on January 24.

Led by moderator Daniel Peek, COO at Hodges Ward Elliott, panelists Rob Hayes, president and CEO at Ashford Hospitality Trust; Greg Juceam, president and CEO at Extended Stay America; Marty Newburger, partner at KSL Capital Partners; and Hubert Viriot, CEO of Yotel first talked about development hurdles such as the cost of construction and the cost of capital.

In today’s wildly popular extended-stay arena, Juceam said growth is buoyant, there is plenty of runway remaining and he believes new entrants to the space will fair well. “There has been a 40% increase in supply over the last eight years and we’re just getting started,” he said, adding that extended-stay supply only accounts for 10% of the U.S. market. “The supply, by the way, has been fully absorbed and demand is up 43% for extended-stay hotels over the last eight years. So, the 10% occupancy premium that the segment enjoys has not been eroded by new supply.”

It’s like ‘whack a mole’ because now we have to deal with interest rates the way they are, and that’s what drives development. So, some hotels will fund with strict equity.

Greg Juceam

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Juceam added that he is starting to see a deceleration in development costs and more availability of supplies. “But it’s like ‘whack a mole’ because now we have to deal with interest rates the way they are, and that’s what drives development. So, some hotels will fund with strict equity.”

That said, Juceam did acknowledge the macroeconomic variables at play and said as a result it might take longer to grow supply. “Some [deals] won’t make it at all. But extended-stay has been a leader.”

In the end, Juceam added that people have raised money, lots of deals are getting done and a lot of extended-stay supply will come to fruition.

Yotel’s Viriot said he is seeing the great pressure on development in North America primarily due to the cost of funding more so than the lack of availability. “As a result, we’ve seen most of our projects in the U.S., which are mostly greenfield developments, difficult to achieve by any means,” he said. “We’ve seen a reduction of supply in our segment across the board, which will impact the next couple of years.”

In Asia Pacific, however, the Yotel story is very different, Viriot continued. “All of our greenfield development is pushing ahead. We signed another six hotels last year, all of which are being developed and are right now out of the ground.”

In Europe, Viriot said development is “a mixed bag” mainly because the cost of funding is prohibitive. “You can justify new growth, but most of the plays are conversions, repositioning and adaptive reuse. That’s where we see most of the growth.”

The labor front

When asked about the cost and availability of labor at the property level, Ashford’s Hays said he is starting to see some green shoots with availability of labor warming up over the last three to four months. “We’ve definitely seen the cost curve finally bend,” he added. “When we look back at our hourly wages across the portfolio versus 2018, I think we’re up maybe 30%. I think this year, we’re finally looking at maybe closer to 3% or 4%.”

At the same time, Hays lamented Ashford’s ongoing need for expensive contract labor and the desire to reduce it significantly. “We are probably at about 80% of the associate level that we had previously, and we’d like to reach maybe 90%... By the end of this year, we hope to get back to a more stabilized labor environment.”

The labor challenge is not just U.S.-centric, Viriot added, and it also crosses industry segments. “Because Yotel is an efficient model, we are better able to mitigate the labor issue – but it is still an issue,” he said referring to Yotel growth that required the recruitment of 600 staff members over the last 18 months. “We have tried to re-work many job descriptions and models, and utilize as much technology as possible to make other jobs as interesting as possible. But it is an issue we face everywhere – in Europe, Asia or in the U.S. It is not to be underestimated.”

Juceam added that ESA has increased salaries by as much as 40% but has not yet jumped into working with gig workers nor tried daily pay programs. “We’re waiting to see how daily pay goes and maybe learn some lessons from it,” he said. “But it’s funny, some of the companies that did daily pay very early are not necessarily pointing to better retention as a result.”

As for expensive contract labor, Juceam told a story about a hotel needing extra help with outside, unarmed security and being quoted $77 an hour, which is three times what it was three years ago. “So, no thank you to that. We’re going to find another way,” Juceam said.

What ESA has tried to address labor challenges is renovating break rooms, updating uniforms and adding human touches to give workers more pride in being part of the company. But, he added, it’s not exactly clear from a data standpoint how those efforts have translated. “We’re starting to see it,” Juceam added, “but it’s hard to know if there are any magic bullets.”

Capital markets

KSL’s Marty Newburger talked about how the state of capital and credit markets are sucking up a lot of cash flow today. “In many instances, our interest expense has tripled, effectively. ,” he said. “So, that reduces what it is we can reinvest in the properties. We are trying hard to figure that out.”

Peek added that the state of capital markets are also a big gating issue for the transaction market and if there was better liquidity and better priced debt, there would be a lot more M&A activity given the amount of equity in the world.

In response, Newburger suggested that there is clearly a need to fill in the capital stack, and someone will step in to fill it. “There’s no point for a seller taking, effectively, a mark-to-market when someone else is going to buy an asset,” Newburger said. “Financing costs have gone up and loans are effectively repricing. So, we have a credit platform that we’re very active on and would love to be the ones to fill that gap and provide solutions. But we’re effectively a spread lender. So, when the base rates have come up so much, there’s only so much that that we can do as a lender.”

Hays added that he thinks there’s going to be more opportunities for people to potentially do deals in the next 12 to 24 months than there were during COVID. He said he isn’t seeing a lot of distress but pointed to highly incented owners that need to sell because they’re coming up for an extension test on their loans that will require a sizable paydown. “You have floating rate debt and figured out that you’re interest rate cap is 10 times or 50 times more expensive than it was not too long ago,” he said.

On top of that, Hays said some market like San Francisco are having structural issues and are not recovering as quickly. “You may just have to pull the ripcord and say, ‘look, I may believe in San Francisco over the next 15 years, but I don’t for the next three.”

As soon as the debt market comes back, Hays added, he expects more activity among the lodging REITs because he called the model structurally broken. “We [REITs] just don’t get enough attention in the investment world. All the REITs are trading at massive discounts to their underlying values, and that won’t stay there forever.”