Discussion ranges from playing ‘whack a mole’ with
development challenges to deal flow and bending the curve on labor
costs.
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
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.”